Clause 170 - Policies of life insurance etc: miscellaneous amendments

Finance Bill – in a Public Bill Committee at 8:55 am on 22nd May 2003.

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Question proposed, That the clause stand part of the Bill.

Photo of John Healey John Healey The Economic Secretary to the Treasury

The clause introduces the four measures in schedule 34 and provides that they take effect from Budget day. They all relate to the way in which gains from life policies are taxed in the hands of the policyholder. The clause and schedule contain a number of beneficial measures affecting the taxation of gains from life assurance. They provide new exemptions, while correcting some anomalies and closing some loopholes.

Part 1 of schedule 34 deals with group policies: policies that insure the life of more than one person and pay benefits on the death of the persons whose lives are insured under the policy. Part 2 deals with charitable and non-charitable trusts. Part 3 contains a minor amendment applying only to annuities issued to friendly societies. Part 4 repeals, subject to transitional provisions, the rule that enables the owner of a life insurance policy to defer tax by allowing a policy to mature and reinvesting the proceeds in a new policy instead of extending the term of the old policy.

The changes in the clause and schedule represent some tidying up of the special regime for taxing gains from life policies. When it has been possible to consult the industry, we have done so to ensure that the changes meet the industry's concerns. Consequently, many of the changes proposed in the clause and schedule are welcomed by the industry. That is particularly true of the new exemptions for group policies, which the industry has sought for some time. The new exemption is the main change provided for by the clause and schedule.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

Sir Nicholas, may I welcome you to chairing our sitting this morning and wish you a restful break?

As the Economic Secretary commented, in principle the industry welcomes the exclusion of group life policies from chargeable events, which is the main issue in the clause. The Law Society and others have raised some aspects for clarification and discussion relating to the pertaining conditions. Our coming amendments relate to those aspects. First, we want to clarify whether sums paid to a partnership for its benefit should be regarded as belonging to the individual's beneficiary. Secondly, we want to find out why, in principle, a charity that has a life policy gain should pay tax on it when it would be exempt from capital gains tax if it had arisen in the individual's hands. Thirdly, we want to focus on the disparity of treatment between charities according to their constitution and whether they are trusts, companies or associations—using ''charities'' in its loosest sense.

The new exemption for gains on some closely defined group life policies in section 539A of the 1988 Act appears to exclude policies in which the beneficiaries are any person other than individuals or charities, and policies in which one is insured for life benefit on the death of another by virtue of any right that is related to his being one of the insured lives. There are frequently policies in pension schemes—I recollect that the arrangements are thus for Members of Parliament—where individuals are invited to nominate whether they want their spouses or partners or children to benefit on their death. Would that be affected in any way by the provisions?

No reason is given for the restrictions that could significantly inhibit the value for exemption. For example, how is the insurer or anyone else to know whether a real trust created by an insured life will meet the conditions for exemption, and why should the exemption not apply to a group policy on the lives of members of the partnership with the firm as a beneficiary? Again, there is a practical point to be made, which is that partnerships, as with companies, will often want key man insurance that may be structured in that way, it being crucial that the partnership should benefit from the key man insurance.

Photo of John Healey John Healey The Economic Secretary to the Treasury

We will deal with the question whether the provisions should apply to partnerships of firms when we come to debate the relevant amendments to the schedule. On the other question that the hon. Member for Arundel and South Downs (Mr. Flight) posed about whether the clause will have an impact on nominated beneficiaries—he cited the parliamentary scheme—the answer to that is no.

Question put and agreed to.

Clause 170 ordered to stand part of the Bill.