Schedule 34 - 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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Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury 8:55 am, 22nd May 2003

I beg to move amendment No. 140, in

schedule 34, page 398, line 17, leave out from beginning to end of line 21 and insert—

'(a) one or more individuals and/or charities beneficially entitled to them, or

{**?h=1.5pt**}(b) a trustee or other person who does not have power to secure that the sums or other benefits are paid to or for, or conferred on, or applied in favour of, any person other than one or more individuals and/or charities beneficially.'.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

With this it will be convenient to discuss the following:

Amendment No. 141, in

schedule 34, page 398, line 23, at end insert—

'; and sums paid or belonging to a partnership of individuals for the benefit of the partnership shall be regarded as paid or belonging to the individuals themselves beneficially.'.

Amendment No. 155, in

schedule 34, page 398, line 36, leave out from 'referable' to 'policy' in line 37 and insert

'solely to that individual's being one of the individuals whose lives are insured by the policy, but does not include any such right that is referable to that individual being a member of a partnership of individuals all or most of whose lives are insured by the'.

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

These and forthcoming amendments essentially pick up on the points of principle that I have raised. Amendments Nos. 140 and 141 would avoid making the conditions unnecessarily rigid and unsuited to typical circumstances, and would make the conditions reflect the intention in the explanatory notes and new subsection (7). Benefits under a group life policy will typically be held under flexible trusts allowing the ultimate beneficiaries to be selected after the death of a given life assured. The present wording fails to cover the position in which someone might desire part of the sum in question to be paid to a charity and the remainder to an individual. The amendment would clarify, without needing to rely on the Interpretation Act 1978, that the condition is satisfied when more than one individual or charity is involved.

Amendment No. 155 would better reflect the intention evident in the explanatory notes, and would protect partnership life group policies from being left within the charge that the provisions otherwise exclude.

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

The measures in part 1 of the schedule ensure that, provided certain conditions are met, the group life policy will be entirely outside the scope of the special regime for taxing policyholders on the gains that they make on their life insurance policies. The aim of amendments Nos. 141 and 155 is to extend the scope of the exclusion to group policies providing for payment to partnerships on the death of the individual partners. The hon. Member for Arundel and South Downs has explained that the Law Society advocates the amendment. That is understandable, because the big professional partnerships—particularly lawyers and accountancy partnerships—would take advantage of the exclusion were it implemented.

Amendment No. 140 would replicate the Interpretation Act 1978. It is intended to help individuals who are covered under group life policies, which provide death benefits to their families, dependants and others. Group life cover is broadly in line with the cover provided within approved pension schemes. It is not intended or designed to cover payments, particularly commercial

arrangements, of the kind that the hon. Gentleman discussed. Policies in which the beneficiary on death is the partnership to which the deceased belonged are not within the category of group policies, and it is therefore inappropriate to widen the scope of the measure to include them.

I hope that the hon. Gentleman will withdraw the amendment; if not, I must ask my hon. Friends to reject it.

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

The Economic Secretary's argument is unclear. It is one thing to say that such a policy would not be used by a partnership. It is entirely different to say that the clause is specifically designed to exclude partnerships benefiting from the key man insurance of one of their partners, which is unreasonable. The Government have encouraged the use of limited partnerships as an alternative to a corporate structure. Like a company, a limited partnership faces severe risks if a key person working within it dies and their earnings cease. I cannot see any reason why a limited partnership should not have key man insurance in a fair and tax-efficient fashion. Will the Economic Secretary clarify his comments?

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

The provisions in the clause and the schedule are not designed to include such partnerships, because the policy purpose behind the provision is to provide the exemption, which will assist group life policies that provide death benefits to families, dependants and others. It is not designed to incorporate the commercial partnerships in which the hon. Gentleman is interested.

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

I cannot see a good reason why such partnerships should be excluded. Having clarified the Government's position, we want to put the amendment to the vote.

Question put, That the amendment be made:—

The Committee divided: Ayes 7; Noes 16.

Division number 12 Adults Abused in Childhood — Schedule 34 - Policies of life insurance etc: miscellaneous amendments

Aye: 7 MPs

No: 16 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

Question accordingly negatived.

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

I beg to move amendment No. 157, in

schedule 34, page 400, line 35, at end insert

'; and at the end of that paragraph (b) insert ''but subject to subsection (1AA)'','.

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

With this it will be convenient to discuss amendment No. 156, in

schedule 34, page 401, line 10, at end insert—

'(7A) After that subsection insert—

''(1AA) Where the rights referred to in subsection (1) above were, immediately before the happening of the chargeable event in

question, in the beneficial ownership of a charitable company, or were held as security for a debt owed by a charitable company, the same tax credit shall be available to that charitable company (with the same related consequences) as though the charitable company had been the trustees of a charitable trust; and for this purpose ''charitable company'' means a company (within the meaning of section 832) which is a charity (within the meaning of section 506).''.'.

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

Again, this issue has been raised by the Law Society. The amendments seek to avoid differences between the tax treatment of different charities, which arise as a result of the manner in which they are constituted. The provisions in part 2 of the schedule, on charitable trusts, seem to throw up an unjustifiable disparity in treatment, depending on the structure of a charity. How a charity is constituted should not affect its tax treatment. The amendment would put charities constituted other than as trusts into the same position as charitable trusts.

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

As the hon. Gentleman has said, the amendments would put a charity constituted other than as a trust into the same position as a charitable trust when it makes a gain from a life insurance policy. They would do that by giving corporate charities some tax credit in relation to such a gain. The main effect of the change that we have made for charities that are trusts in this part of the schedule is to treat gains from life policies in the same way as their other non-exempt income; in other words we are bringing those into line. The provision taxes the trustees not the donors, and reduces the rate to that generally applying to charities' other non-exempt income.

Gains made by a charitable company are already taxed on the company and are liable to tax at the same rate as the charity's other non-exempt income. Therefore, the reasons for changing the taxation of charitable trusts do not apply to charities that are companies. A charity constituted as a company is liable to corporation tax not income tax on its non-exempt income and chargeable gains. It is therefore subject to different rules and different rates of tax from those that would apply were it constituted as a trust. Those different rules apply to the income and chargeable gains that charities have from all sources. It is by no means clear that it is right to single out life insurance gains for treatment different from that for all other types of non-exempt investment income.

The 1998 changes to the chargeable events regime applied to trusts put the few charitable trusts that held life insurance products into a difficult position. The change that the Government propose this year will remove a significant administrative burden for charities, donors, the Revenue and everyone involved in insuring that self-assessment returns are correct. The 1998 changes did not affect the way that companies, whether charities or not, were taxed. The tax treatment of insurance gains made by corporate charities has been unchanged since 1989.

The piecemeal approach of the amendment, singling out life insurance gains, as one type of income, for special treatment looks wrong in principle. On that basis, I encourage the hon. Gentleman to withdraw the amendment.

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

I take the Economic Secretary's point that the provision is designed to address a specific

situation in relation to charities that are trusts. Will the net result of that be that, although a corporate charity has a different tax regime, the charity that is a trust is likely to be better off in terms of insurance gains? I note—although I am not saying that I welcome it—that many charities in other EU countries are corporate rather than trusts, so one suspects that there may be an increase in the number of charities in this country that are structured as corporate bodies rather than trusts in the future.

The purpose of the provision is to sort out the position of trusts, but if it then creates an anomaly in the overall amount of tax to be paid under the different regimes, that should be addressed, because it is undesirable to have tax arrangements that provide incentives for one sort of structure but not another. The issue needs to be addressed, but it is not fundamental to the objective of the clause. I shall not press the amendment to a vote, but I would like to hear the Economic Secretary's response.

Photo of John Healey John Healey The Economic Secretary to the Treasury 9:15 am, 22nd May 2003

As I explained, our proposed changes are designed to assist charitable trusts and deal specifically with the difficulty that was created by the 1998 changes, which did not affect charities constituted as companies. As we always do, we shall keep the provision under review and if the sort of anomalies that the hon. Gentleman is concerned about arise and it becomes apparent that they are unjustified, we will consider taking appropriate action.

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

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

I beg to move amendment No. 154, in

schedule 34, page 404, line 10, at end add—

Part 5

Removal of Double-counting of gains

16 In section 541(1) of the Taxes Act 1988 (life policies: computation of gain), delete ''and'' at the end of subparagraph (i) in each of the paragraphs (b) and (c), and at the end of subparagraph (ii) of each of those paragraphs insert ''and

(iii) to the extent that, apart from this subparagraph, a gain would otherwise be treated as arising on the happening of the chargeable event in question, the lesser of that gain and the total amount of any gains treated as accruing on the happening of any previous chargeable events which comprised an assignment of the policy;''.'.

This is another issue that was raised by the Law Society. The intention in the amendment is, in parallel with the capital gains tax amendment to clause 156, to remove an equal and opposite anomaly in the income tax legislation on gains on life policies. Clause 156 deals with capital gains tax but is one sided in tackling anomalies between the income tax chargeable gains regime and the capital gains tax regime for life policies and deferred annuity policies. To deal with a particular scheme that had exploited that, clause 156 eliminates the anomaly that worked in the taxpayer's favour, but does nothing to maintain the balance by tackling the equal and opposite anomaly, which can give the Revenue two tax liabilities on the same sum, which in the taxpayer's hands may not be a gain.

The editor of Taxation magazine raised the matter and I understand that the problem would arise particularly in the second-hand market for insurance policies when a tax bill arises if someone disposes of a single-premium policy at a profit. If someone buys it and on-sells it they can be left with a tax liability and a real loss. The Minister may have seen the arithmetic set out in the Law Society's example.

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

The purpose of the amendment is to reduce the size of a gain on the maturity or surrendering of a life assurance policy when there was a previous gain from an earlier assignment or assignments of the policy. As the hon. Gentleman explained, the reason for the amendment is the capital gains tax proposals in clause 156 which are designed to put an end to avoidance schemes that are used purely and directly to create tax losses. The possible income charge at which the amendment is directed is not connected with the capital gains proposal and I do not agree with the hon. Gentleman that the capital gains changes justify the amendment.

The legislation governing chargeable event gains is notoriously complex, as I have discovered in recent days. I regret to tell the hon. Gentleman that his amendment will compound rather than simplify the problem. It addresses an apparent unfairness in the way that the policy gains are taxed. The solution that it provides would merely add to the complexity and, in many circumstances, would be quite unworkable because the information needed to make it work would not be available to the taxpayer or the insurance company. I accept that in theory there is the possibility of a double charge for life insurance policies. The question is whether that possibility is so severe and sufficiently common in practice to justify making complex amendments to the law. They would be far more complex than the hon. Gentleman or those who framed the amendment perhaps envisaged.

Legislation has been in place for 20 years, and there is little evidence that it has caused or is causing difficulties of the sort to which the amendment is directed. The hon. Gentleman will know that the commercial market in second-hand policies is a sophisticated market, and those who are involved in it are well aware of the tax rules and their consequences. He will also know that it is almost always a market of qualifying policies, where the original assignment will not give rise to a gain. In practice, therefore, double charges do not arise in any great number. That is why the legislation has not been changed before now by this Government or previous Governments.

I do not consider that the closure of the capital gains loophole justifies the proposed change. On that basis, I encourage the hon. Gentleman to withdraw the amendment.

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

It strikes me as a pity that the Government should tidy up the tax law in one area and, as the Economic Secretary effectively admitted, leave an unsatisfactory structural situation on the other side of the coin. There is a situation in which double tax could arise. I will duly blame the Law

Society for the form of its amendment if what the Economic Secretary says is correct. There is no point using it if it cannot achieve what it is intended to achieve. However, it raises the problem and, although it should not arise where qualifying policies are involved, no market should be messed around with by wrong tax arrangements.

Photo of Michael Jack Michael Jack Conservative, Fylde

My hon. Friend is teasing my interest in the matter. Did the Law Society quantify the amount of tax that it thought would be affected by its proposal?

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

Not in the aggregate, but in terms of an individual situation it did. The prevailing situation in which the tax arrangements apply seems extremely tax anomalous. It may well be that the volume of such business affected is modest with regard to additional tax revenue. That is not a sound argument for having a tax regime that is manifestly wrong. However, partly on the basis of the amendment not achieving its objective, and partly on the basis of materiality, I feel that there is no point in pressing it to a vote. I hope that the Government will consider tidying up the matter in due course, and I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 34 agreed to.

Clause 171 ordered to stand part of the Bill.