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Proposed changes to Time Aportionment Relief

HMRC is proposing to overhaul the special tax rules (currently only available to offshore bonds) which provide UK income tax relief on policy gains for UK resident policyholders, where they have been non-UK resident during the period of ownership.

HMRC is proposing to overhaul the special tax rules (currently only available to offshore bonds) which provide UK income tax relief on policy gains for UK resident policyholders, where they have been non-UK resident during the period of ownership.


Here’s a broad example of the current rules:

A client is non-UK resident when they invest £100,000 into an Isle of Man Offshore Bond. They move to the UK ten years later and finally surrender the policy in year 15, with a value of £210,000.



The tax charge is:


(Policy Gain) X (Period of UK Residence)

Total Time Policy in force


In this example, the amount chargeable to tax is reduced by 66%, from £110,000 to £37,400, by taking advantage of the relief.


The proposed changes are as follows:


Extend the relief to policies issued by UK insurers

The relief can currently only be used in respect of gains from policies issued by non UK insurers. HMRC feel that this isn’t fair and it’s therefore proposed to extend the rules for time apportioned reductions so that they also apply to policies issued by UK insurers.


Appropriate reductions

Currently, the relief is based on the residence history of the policyholder (the legal owner), rather than the beneficial owner of rights under the policy, who may be a different person. To ensure that the relief more accurately reflects the residence history of the persons who are generally liable to tax on the gains, it’s proposed that the reduction should only reflect the residence history of an individual who is the beneficial owner of rights under a policy.


For policies where the beneficial ownership of rights is held by more than one individual, it is also proposed that the rules be clarified to confirm that the calculation is based on each individual’s residence history applied to their share of the gain from the policy.


In addition to this, the current rules can create anomalous results where a policy has been assigned from one person to another, as the periods of non-residence taken into account may be greater than a person’s period of ownership of that policy. It is therefore proposed that the relief should only reflect an individual’s residence history during their period of ownership of a policy.


Lastly, the current rules calculate the amount of the reduction by applying the ‘nonresident’ fraction to the gain. Although this is a straightforward calculation, it takes no account of when premiums are paid into a policy and, in effect, treats top-up premiums as paid when the policy was first issued, even if they were paid after the policyholder became UK resident.


The effect of this approach is to give relief on an amount that may be greater than the proportion of the gains that accrued during the period of non-residence, and HMRC see this as a tax advantage.


Finance Act 2012

The above legislation includes provisions to restrict the deduction for gains arising earlier in the life of a policy where they were not subject to UK Income Tax. Given the possibility that the earlier gains may have been subject to foreign tax, consideration will be given to whether the rules for time apportioned reductions should be extended to reflect the residence history of a previous owner of rights under a life policy, or whether existing double tax relief provisions will be effective.


A more straightforward approach may be to retain the current position and to rely on the existing scope for a subsequent owner to claim double tax relief, or unilateral credit relief where they are taxed in the UK, on an amount that has also been taxed on a previous owner by a non-UK fiscal authority.


Insurer reporting

Given the wider number of situations in which gains included on chargeable event certificates will differ to the amount of gains liable to tax, it’s proposed that insurers will be required to include a new notice on certificates sent to policyholders. This notice will advise policyholders that, for self assessment purposes, the gain shown on the certificate may need to be adjusted in certain unusual situations. The additional guidance being proposed by HMRC is, in my opinion, a necessity otherwise both Advisers and Product Providers are going to receive complaints.


In addition to the above, proposed statutory definition of residence for individuals contains an anti-avoidance rule that will impact on chargeable event gains arising during temporary periods of residence outside the UK. It’s intended that this rule will be included in Finance Bill 2013.


HMRC is currently seeking views on whether the time apportioned reductions will operate effectively in conjunction with the new antiavoidance rule.