Information to be provided to UK resident policyholders
The information that must be reported to policyholders and the circumstances in which it must be supplied are similar to that for UK insurers. Please see the Taxation of UK Bonds article (/knowledge-literature/oracle-plus/taxation-uk-investment-bonds) for more information including time limits.
The following two aspects relate only to offshore policies:
- Whether income tax is treated as paid on a gain from the policy Number of years for top-slicing relief purposes
- Whether income tax is treated as paid on a gain from the policy
The tax representative is required to report whether income tax would be treated as paid, and if so the amount of the tax.
In practice however, where the policy is from an overseas insurer it will almost always be the case that no income tax is treated as paid on the gain. The main exception is where the policy was taken out before 18 November 1983 and has not been varied since then to increase the benefits secured or extend the term.
Number of years for top-slicing relief purposes
A tax representative is required to calculate and report the full number of years for top- slicing relief. Where a policyholder was not resident in the UK for part of the policy period, the number of years is reduced to reflect this but the tax representative must not report the reduced number, even if it has the information to calculate it. The self-assessment tax return guidance (/government/publications/gains-on-foreign-life-insurance-policies-hs321- self-assessment-helpsheet) also tells a policyholder how to work out this reduced number.
Information to be provided to HMRC
A tax representative is also required to provide information to HMRC:
- On chargeable events other than whole assignments if the gain, aggregated with any connected gains exceeds half the ‘basic rate limit’ for the tax year in which the gain arises, and
- On all whole assignments for money or money’s worth, regardless of the size of the gain.
For the tax year ended 5 April 2021, half the basic rate limit is £18,750.
A gain is connected with another gain if they both arise on chargeable events in the same tax year on policies with the same overseas insurer where there is at least one common policyholder.
Even where the gain is below the basic rate limit, HMRC may require a tax representative to supply a copy of the chargeable event certificate that it was required to send to the policyholder. In practice, HMRC is not likely to invoke this power frequently since in enquiry cases the taxpayer will be the first person from whom HMRC will seek to obtain evidence in support of entries in the tax return.
The time limit for a tax representative to send a certificate to HMRC is the same as for a UK insurer. Please see the Taxation of UK Bonds article (/knowledge-literature/oracle-plus/taxation-uk- investment-bonds).
Supply of information directly by overseas insurer
As noted above, an overseas insurer may supply information about chargeable events to policyholders and HMRC directly, rather than through a tax representative. The information required depends on when the policy was made.
- If the policy was made after 5 April 2000 then the information to be provided is largely the same as for UK bonds, the main difference being that gains on assignments should be reported.
- If the policy was made before 6 April 2000 then the information that the insurer must provide is more limited.
A chargeable event for pre-6 April 2000 policies is reportable if it is a last event (ie if it brings the policy to an end). This will be on the maturity or full surrender of the policy, or on the death of an individual giving rise to benefits under the policy. The ‘last event’ is only reportable where the total of benefits paid:
- on the event, and
- on any other ‘last events’ in the same tax year on policies with the same insurer where at least one of the policyholders is the same…
…exceeds twice the basic rate limit (2 x £37,500) = £75,000 for 2020/21), unless the overseas insurer is satisfied that no gain arises.
If the ‘last event’ is a death, the insurer must report where the death benefit exceeds twice the basic rate limit. It must not substitute the surrender value immediately before death, even though for life policies that figure is used in the chargeable event gain calculation.
It is usually clear when a policy was made. However, where a policy is altered after 5 April 2000 in such a way that goes to the root of the policy it will bring into existence a new policy, which will then fall within the reporting rules for policies made after 5 April 2000. An
example of such a change would be a change of life assured.
The insurer does not have to report information about a chargeable event on a pre-6 April 2000 policy to the policyholder. However, the insurer may send the policyholder a copy.
For post 5 April 2000 policies, an overseas insurer must provide a certificate to a policyholder within three months of the chargeable event. However, an insurer might not find about an assignment or death until sometime after the event. Accordingly, it is acceptable to issue the chargeable event certificate to the policyholder within three months of being notified of the event. Certificates should be sent to HMRC within three months of the end of the tax year in which the certificate for the policyholder was sent.
Currency in which gains and other information may be reported
Some policies may be denominated in a currency other than sterling. UK resident policyholders have to enter the gains in sterling in their tax returns. If chargeable event certificates are not expressed in sterling the method of currency translation to be used is described below.
Reporting thresholds
In many cases the tax representative or insurer will need to calculate the chargeable event gain or policy proceeds in sterling to check whether it needs to report the event to HMRC because the reporting thresholds are linked to the basic rate limit, which is denominated in sterling. Currency conversion should be at the rate applying on the date of the event.
Calculation of gains and other amounts for policies in foreign currencies
Where a tax representative or insurer reports a gain in sterling, it should compute the gain by calculating the amount of the chargeable event gain in the currency in which the policy is denominated and then convert it into sterling at the conversion rate on the date of the event. This ensures that currency fluctuations during the life of the policy are disregarded.
Where a tax representative or insurer reports other amounts in sterling, for instance the premiums paid where there has been an assignment, they should be translated at the rate applying on the date of the chargeable event.
Reporting duties where the policy is held on trust
Where a policy is held in trust, the trustees would in most cases be the policyholder. A trust is a single continuing body for tax purposes and so the trustees are treated as a single policyholder.
Where an overseas insurer or tax representative must send a chargeable event certificate or information notice to HMRC, it should enter on the certificate or notice the name and address of the trustee that has been designated to receive correspondence. If there is no such designated trustee then the insurer should include the names and addresses of all the trustees.
Where it must send a chargeable event certificate to the policyholder, it should send a certificate to the first named trustee, or to any trustee for which it holds an address.
Whether trustees are UK resident
Insurers and tax representatives are only required to report events on ‘relevant insurances’. A policy will only be a relevant insurance if the policyholder is resident in the UK so where the policyholders are trustees it is necessary to know whether the trustees, when regarded as a single body, should be treated as UK resident.
If all or none of the trustees are resident in the UK then the trustees must be treated as UK resident or not as appropriate. But where the residence of the trustees is mixed, some UK resident and some not, the position is less straightforward.
Then the trustees are treated as UK resident if the settlor of the trust was resident or ordinarily resident or domiciled in the UK when he or she created the trust or provided funds for it. This is not necessarily information that an insurer or tax representative will hold and it is not expected to take steps to obtain it. An insurer should act on the basis of information in its possession. Where it knows that at least one of the trustees is UK resident, it should treat the trustees as being UK resident, unless it has information to suggest otherwise, and report events on the policy to the trustees and HMRC where required.
Chargeable person
Either the trustees or the settlor may be chargeable on any gains arising on the policy. However, in operating the chargeable event reporting rules an overseas insurer or tax representative does not need to know who the liable person is, since the rules only require that information is provided about, and to, policyholders. Insurers do not need to establish the identities of the beneficiaries or settlors of the trust.
