14 September 2012
Life Insurance – Qualifying policies
AFM response
The Association of Financial Mutuals (‘AFM’) is a trade body that represents mutual insurers, friendly societies and other financial mutuals right across the UK. We represent 55 mutual organisations based in the UK and have 32 professional service firms within our associate membership. Mutual insurers and Friendly Societies are member owned financial institutions that encourage self help and personal responsibility. We assist the work of government by helping individuals to take responsibility for planning and providing for their own financial affairs. Our members typically have over 100 years of experience and heritage in financial services.
Mutual insurers bring choice and competition to both customers and to the insurance market, which is vital to a healthy financial services sector in the UK. Many Friendly Societies continue to specialise in providing products with very low premiums, which means that their services are accessible to all income levels.
The AFM welcomes the opportunity to comment on the consultation relating to the imposition of a cap on premiums for qualify policies.
Members
The AFM currently has 55 member companies, all resident in the UK, who collectively look after the savings, protection and healthcare needs of 20 million customers and manage assets of over £90 billion as at 31.12.2011. A list of our membership is provided in Appendix 1.
Our members are all incorporated, or organised, in the UK with the aim of offering financial products primarily to UK tax residents. Our members offer a range of insurance products including: tax favoured products (pensions, Individual Savings Accounts (‘ISAs’), Child Trust Funds (‘CTFs’), investment life products including qualifying policies, and tax exempt savings plans (‘TESPs’)) and other non tax favoured products (protection policies, general insurance and healthcare policies).
Question 1: HMRC would welcome respondents’ views whether the ‘12 month period’ flexibility is preferred to applying the limit on a tax year basis?
We agree that the 12 month period is appropriate for reasons of consistency elsewhere. It is important that the test should be by reference to premiums due and payable rather than paid in the 12 month period (assuming the premiums are in fact paid). We note that companies will have to ensure policy premium due and payable dates are set to comply with this (rather than to the nearest business day, for example).
We have one dissenting opinion which would prefer tax year reporting.
It is not in our opinion the responsibility of the company to monitor premiums other than in respect of its own policies.
Question 2: Do respondents believe that this approach will ensure that the limit is effective?
The approach is to look to the beneficial owner of the policy and apply the premium test to him or her, rather than (necessarily) the person paying the premium. It is also a requirement that there is an identifiable beneficial owner or owners so that, for example, policies held in discretionary trusts are precluded from being qualifying policies.
We consider that it would be preferable for there to be either a definition of beneficial owner or strong and comprehensive guidance – we consider that this is likely to be an area where companies will receive queries from potential (or existing) customers and from financial advisers.
We note that at present the company may not know the identity of the beneficial owner of a policy so this will be additional information in many cases. See also our response to question 7.
Question 3: We would be interested in views on whether there is a need to identify or nominate the policy that breaches the limit where a number of policies have been issued at the same time (e.g., cluster policy arrangements).
From the perspective of the insurer this can only apply for its own policies. Rules will have to identify the situation of multiple issuers. This should be a first-in basis (the older or oldest policy would be qualifying if there is a choice between policies). We think this is, practically, how the test would best be applied – seeking the policy or policies which are qualifying and then identifying the remainder as non-qualifying.
For cluster policies there should be an identification number for each policy in the cluster and again a first-in method (for a sensible alphanumeric ordering) should apply to identify the qualifying policies. As a practical measure we doubt many cluster qualifying policies over the limit will be issued.
Question 4: HMRC welcomes views on the impact of this approach.
We consider that companies should be able to offer policies in multiple ownership and to identify one of the beneficial owners as the nominated owner for this purpose. Individual companies may decide to prohibit multiple ownership. Where the nominated beneficial owner changes, there should be a redeclaration (if the insurer is aware of the fact). This is an exception to the general rule on assignments of beneficial ownership – assuming there is no consideration at that point.
We refer to the note prepared for the working group in this respect.
Question 5: Do respondents believe that the simplicity offered by this approach outweighs the greater flexibility allowed by scope to assign policies?
There is no reason why the policy should lose its qualifying status in the hands of the assignor (if there would otherwise be a chargeable event) but agree the assignee should not in general obtain qualifying status.
Question 6: Are there certain circumstances where respondents believe that assignments should not affect QP status (such assignments that are part of a divorce settlement or as a result of a Court Order)?
We agree divorces settlements or Court Orders should not be within that general rule. We consider all transfers between husband and wife or civil partners should be similarly excluded, as should renominations of the beneficial owner for policies with multiple owners.
In all cases this is subject to redeclaration.
In the particular case of assignment of policies as security for a debt, we consider the “original” policyholder should regain qualifying status if the policy is assigned back e.g. on repayment of the debt.
Question 7: HMRC understands that existing declaration processes could incorporate this new requirement. Do respondents believe that anything further is needed to ensure that policyholders understand the implications of these requirements?
We think it is fundamental to the operation of the new rules that an insurer should be able to rely conclusively on the declaration in assessing whether a chargeable event certificate is required. (The insurer should also verify from its own data that the “ordinary” conditions are met – and that the policy’s own premiums are below the limit.) HMRC may repudiate the declaration by notifying the company (after resolving the position with the taxpayer involved).
We note that the company may not at present know the identification of the beneficial owner and this will be new data requiring systems changes. Companies may not record national insurance numbers or unique taxpayer reference numbers for their customers and indeed there is no reason for them to do so at present. These systems changes, for new policies, may not be straightforward. (We refer below to issues with transitional and old policies.)
Where customers are using the services of a financial adviser we should expect that this would be included in the advice. We recommend HMRC provide detailed and comprehensive guidance which companies can included in their documentation to facilitate customer compliance.
Question 8: It is recognised that this reporting will introduce an additional administrative burden. Respondent’s views on the likely cost and other impacts are welcomed.
We have referred to the need to gather information which may not be currently held on the company’s system and the associated need for expensive changes. We are not in a position to provide the costs involved. These changes are being introduced at the same time as a number of other demands on system resources which are likely to make the costs even more substantial. We note that there is no benefit to the company from these changes – and for a mutual the costs will have to be borne by the policyholders and members.
We suggest that for a friendly society writing TESPs but not BLAGAB[1], there should be no reporting requirement given the level of the TESP limit. Any reporting by this group would clearly produce no value to the authorities and create disproportionate system costs to friendly societies.
Question 9: Do respondents have views on any alternative approaches, taking into account the need for HMRC to be able to test compliance with the limit?
We recommend that the reporting requirement is an annual return of new and terminating qualifying policies with the appropriate identification details (e.g. beneficial owner, national insurance number/UTR, policy reference, policy annual premiums).
We understand HMRC will want to test compliance by taxpayers and we accept that this is the practical approach.
We do not consider that companies should be required to be involved in any queries between HMRC and the taxpayer regarding multiple policies or similar issues except to be notified by HMRC of the withdrawal of the declaration.
Question 10: Are there any other policy types or policy features which require further consideration as to the application of the rules?
No comments.
Question 11: Do respondents have any comments on the assessment of equality in the Initial Tax Impact Assessment set out in Chapter 7?
We do not have comments on the “Equalities impacts” section.
We note that under “Impact on businesses” there is a comment that the impact on smaller insurers and friendly societies is “unlikely to be significant”. We disagree since the proposals may impose substantial compliance and systems costs. In particular, systems are unlikely at present be set up to record the beneficial owner and his or her national insurance number, and modifying the system for this data may be a significant project and give rise to disproportionate costs. For the smallest societies this can be mitigated by our proposal that TESP-only societies are excluded from reporting.
Question 12: Do respondents believe that this approach will be effective in ensuring that the limit will be adhered to? If not, what additional provisions might be needed?
We note that the core proposal here is that for a discretionary trust the settler is the relevant person for the purposes of the RRQP rules. Since qualifying policies held in discretionary trusts were not prohibited from 21 March 2012 a rule is required and this does not appear unreasonable.
Otherwise we consider that the rules should apply mutatis mutandis. We note that there is no declaration requirement and thus companies may not be aware that a policy is an RRQP if its own premiums are below the limit. No reporting requirement should therefore apply to such a policy.
We note that transitional policies count towards the QP limit but the company will not have beneficial owner data and thus will not be able to report on terminations in the same way as for new policies. We do not consider it reasonable for HMRC to require further information to be gathered on in-force policies in general.
Question 13: Based on experience of policies issued since 21 March 2012, do insurers and friendly societies believe that significant numbers of policies will be RRQPs, and what are the likely impacts of this approach?
We are not in a position to respond.
Question 14: Are there any areas in the guidance which respondents feel could be improved to help life insurers and friendly societies in the absence of formal approval of QP status by HMRC?
We note that Schedule 15 is likely to be simplified in line with Annex C for new policies. We suggest consultation covers the further guidance likely to be required once near-final draft legislation is available this autumn).
Question 15: Annex C includes a schedule of provisions that HMRC understands are little used, if at all. Respondent’s views on the impact of removing these provisions are welcome.
We assume these proposal will only apply to new policies (i.e. those made on or after 6 April 2013). The rules currently in Schedule 15 will continue in force for existing policies – although as a way of simplifying the Schedule some provisions may be moved elsewhere.
1 to 4 are related to making protection business not be qualifying so that it does not count towards the limit. We agree with this approach.
5. Policies < £13pa. We do not know of any society writing new business of this type.
6. We do not believe any new policies of this type can be written now.
7. Quinquennial endowments are normally a non profit whole life assurance with a series of five year endowments so the member receives a payout every 5th year normally up to a retirement age, say 65. We are not aware of our members potentially offering such business.
8. Mixed sickness and life – we note this is business as referred to in section 154 of the Finance Act 2012. As far as we are aware no society currently issues new mixed business.
9. We are aware of at least one society which issues policies including commutations in each circumstance. We are concerned that commutation otherwise than on emigration is not particularly consistent with the new rules and it may be appropriate to remove the right. If a society is not able to accept payments from an ex-pat account we regret that it appears the policy may have to be made paid-up.
10. We do not consider that this is consistent with the QP limit above.
Matters not covered in the questions
We are concerned particularly as regards mortgage endowments that it may be necessary to increase premiums to preserve expected maturity values. If such a variation were to bring an old policy into the new rules (possibly making it an RRQP, or merely requiring the premium to be included in the QP limit) there would be a large compliance burden on the insurer. The systems will not be set up to accommodate this and changes could be extremely expensive on legacy systems. Manual interventions would be likely to be necessary. We consider that the exchequer risk from such increases – where the target maturity value of an existing policy is being maintained should be slight. Thus we should exclude such circumstances from the variations rule. If the policy does not have a target value this exception cannot apply. (We note that such changes are not protected from the “normal” qualifying policy tests e.g. the 2x rule.)
For old policies generally similar comments apply about the cost and compliance burden of monitoring such variations and obtaining information of a kind not previously required. Where a policy was sold on the basis of including an option to extend, for example, we consider it should not be regarded as unreasonable for the treatment to continue. We accept that the position might be different from an exchequer viewpoint for very high value policies. We suggest therefore that for old policies a variation should only change the treatment (e.g. making the policy an RRQP and including the premium in the QP limit) if the policy premium is currently (or becomes) in excess of a far higher figure, and we suggest £36,000.
We also suggest that only one extension, of no more than ten years be permitted.
We consider these proposals significantly protect the exchequer from the high value risk whilst minimising the compliance burden on companies and the impact on lower value in-force policies.
If HMRC have any queries on this response please contact Martin Shaw on [0844 879 7863].
Yours sincerely,
Chief Executive
Association of Financial Mutuals
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Life Insurance – Qualifying policies14 September 2012
Members of the AFM
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Life Insurance – Qualifying policies14 September 2012
•Ancient Order of Foresters Friendly Society Limited
•Anglo-Saxons Friendly Society
•B&CE Benefit Scheme
•Benenden Healthcare Society Ltd
•British Friendly Society Ltd
•Bus Employees' Friendly Society
•Cirencester Friendly Society Ltd
•Civil Service Healthcare Society Limited
•Compass Friendly Society Limited
•Cornish Mutual
•CUNA Mutual
•Dentists and General Society
•Dentists' Provident Society
•Druids Sheffield Friendly Society
•Ecclesiastical
•Engage Mutual Assurance
•Equitable Life
•Exeter Friendly Society Ltd
•Family Investments
•Forester Life
•Grand United Order of Oddfellows Friendly Society
•Health Shield Friendly Society Limited
•Healthy Investment
•Holloway Friendly
•Irish Public Bodies Mutual Insurance
•Kensington Friendly Collecting Society Ltd
•Kingston Unity Friendly Society
•LV=
•Metropolitan Police Friendly Society Ltd
•MGM Advantage
•National Friendly
• Newbridge Road Assurance Society
•NFU Mutual Insurance Society Ltd
•Paycare
•PG Mutual
•Police Mutual
•Railway Enginemen's Assurance Society Ltd
• Railway Friendly Society
•Red Rose Friendly Society Ltd
•Reliance Mutual
•Royal London Insurance Group
• Royal Standard Friendly Society
•Scottish Friendly Assurance Society Ltd
•Sheffield Mutual Friendly Society
•Sovereign Health Care
•Sunderland Marine Mutual Insurance Company
•Teachers Assurance
•The Children's Mutual
•The Oddfellows
•The Shepherds Friendly Society Ltd
•Transport Friendly Society Ltd
•UIA (Insurance) Ltd
•Veterinary Defence Society
•Wesleyan Assurance Society
•Wiltshire Friendly Society Limited
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[1]Under section 155 and the FS Regulations, exempt business is not BLAGAB.