Capital Gains Manual

CG69050 - Insurance: life insurance policies and deferred annuities: exemption for second hand policies

Disposals from 9 April 2003: exclusions from the exemption

As CG69040 explains, the exemption for Capital Gains Tax purposes for life insurance policies is not universal - 'second hand' policies are not exempted. For disposals on or after 9 April 2003 the exemption generally given by TCGA92/S210 (2) is not due if

• (on a disposal of the rights conferred by a life insurance policy or deferred annuity) the rights themselves or any interest in the rights, or
• (on a disposal of an interest in the rights conferred by a life insurance policy or deferred annuity) the rights themselves, or the interest in those rights that is the subject of the disposal or any interest from which that interest was directly or indirectly derived

has at any earlier time been acquired by any person for 'actual consideration' - see below.

Broadly, the effect of this is that the rights conferred by a policy are exempted in the hands of the person who takes out a life insurance policy, and anyone who acquires the rights conferred by the policy (or an interest in those rights) from the original policyholder by way of a gift, or an unbroken chain of gifts. But once 'actual consideration' has been given for the rights, or any interest in the rights, the exemption is lost and any gain on a subsequent disposal of the rights is a chargeable gain.

Similarly, an interest in the rights is exempted if no actual consideration has ever been given for that interest, for an interest from which that interest was directly or indirectly derived, or for the rights themselves. But any interest derived, directly or indirectly, from rights (or from an interest in rights) acquired for 'actual consideration' is not exempted. See below for an example of how the exemption can cease to be available as interests in the rights conferred by a life insurance policy are directly and indirectly derived when interests in the policy are created and merged.

Disposals from 9 April 2003: exclusions from the exemption: actual consideration

For the purposes of TCGA92/S210, in relation to disposals on or after 9 April 2003, 'actual consideration' is, with two exceptions, any consideration other than consideration that is deemed to be given for the purposes of Capital Gains Tax. The two exceptions are as follows.

Firstly, the amounts paid under the terms of a life insurance policy by way of premiums, or under the terms of a deferred annuity contract (whether as premiums or a lump sum), do not count as 'actual consideration' - TCGA92/S210 (4).

Secondly, TCGA92/S210 (5) provides that in three circumstances any consideration given on a transfer of the rights conferred by a policy, or an interest in those rights, does not count as 'actual consideration'. The circumstances are as follows:

• If the consideration is given on a transfer between companies such that TCGA92/S171 (1) applies, so that there is no gain or loss on the disposal (see CG45305+);
• If the consideration is given by one spouse to to another, or by one civil partner to another, whether or not TCGA92/S58 (1) (see CG22000) applies;
• If the consideration is given on a disposal that is an 'approved post-marriage disposal' or an 'approved post-civil partnership disposal'.

TCGA92/S210 (6) sets out the circumstances in which a disposal is an 'approved post-marriage disposal' or an 'approved post-civil partnership disposal'. The disposal must be made by an individual to their former spouse or civil partner in consequence of the dissolution or annulment of a marriage or civil partnership and duly authorised by an appropriate court, or similar body. The rights or interest transferred must have been held by the person making the disposal immediately before the marriage or civil partnership was dissolved or annulled. So if a life insurance policy is taken out after the marriage or civil partnership has ended and this is subsequently transferred as part of a consequential settlement any actual consideration given is not disregarded.

As regards the treatment of a policy assigned in pursuance of a pension scheme, see CG67691.

Disposals from 9 April 2003: exclusions from the exemption: example of interests derived directly and indirectly

This example illustrates how interests in the rights conferred by a life insurance policy can be derived 'directly' and 'indirectly' from the original rights, or interests in those rights, as various interests are created and merged. And how the giving of actual consideration at different stages can cause the exemption to be lost.

Facts

• Date 1: Ms Murder owns all the rights conferred by a life insurance policy.
• Date 2: She transfers a half interest in the rights to Mr Doll, so that they each then have a one half interest in the rights.
• Date 3: Mr Doll transfers his half interest in the rights to his three sisters, so each of his sisters has a one sixth interest.
• Date 4: Two of Mr Doll's sisters transfer their one sixth interest in the rights to their nephew, Mr Stone, who then has a one third interest in the rights.
• Date 5: Ms Murder, Mr Doll's sister and Mr Stone, all transfer their interests in the rights under the policy to a third party, Mr Sour.

What 'directly' or 'indirectly' derived interest does each hold

1. From date 1 until date 2 Ms Murder simply held the rights conferred by the policy. From date 2 to date 5 she held a half interest in the rights, which was directly derived from the rights.
2. Mr Doll also held a half interest in the rights from date 2 to date 3, which was directly derived from the rights.
3. Between dates 3 and 4 two of Mr Doll's sisters each held a one sixth interest in the rights, which was directly derived from Mr Doll's interest. The other sister held such an interest from date 3 to date 5. The interest each of the three sisters held was indirectly derived from the rights.
4. Mr Stone held a one third interest in the rights from date 4 to date 5. This was directly derived from the interests in the rights previously held by the two sisters, and indirectly derived from both Mr Doll's interest and from the rights.
5. Mr Sour simply held the rights conferred by the policy, not an interest in the rights, from date 5 onwards.

What if actual consideration was given at some stage

Whether the exemption is available depends on whether the rights, or an interest in the rights, had been acquired for actual consideration at an earlier time.

1. If Ms Murder acquired the rights that she held on date 1 for actual consideration then the exemption would not be available to any of the people in the example. It would not matter if the various interests in the rights held between dates 2 and 5 had not been acquired for actual consideration, since each is directly or indirectly derived from rights that had been acquired for actual consideration. Neither would it matter whether Mr Sour gave actual consideration, since the rights would have been acquired by a person, Ms Murder, for actual consideration at an earlier time.
2. However, assume Ms Murder took out the policy herself. And the only time actual consideration was ever given was when Mr Doll acquired his interest in the rights on date 2. Then he, his sisters and Mr Stone would not benefit from the exemption. Although no actual consideration was given for the interests acquired by the sisters or Mr Stone, these were derived directly or indirectly from Mr Doll's interest that had been acquired for actual consideration. But the interest in the rights Ms Murder had from date 2 onwards would continue to qualify for the exemption, since that interest was derived from only the rights themselves, which had not been acquired for actual consideration. Mr Sour's rights would not qualify for exemption, since an interest in those rights (in this instance, Mr Doll's interest) had been acquired for actual consideration at an earlier time.
3. If the only time actual consideration was given was when the three sisters acquired their interests in the rights, then exemption would not be due to the sisters who gave actual consideration. Nor would it be due to Mr Stone if either of the sisters from whom he received his interest in the rights had given actual consideration. Nor to Mr Sour, for the same reasons as at (b) above.
4. If the only time actual consideration was given was when Mr Stone acquired his interest in the rights then only he and Mr Sour would not benefit from the exemption.
5. If no actual consideration was given until Mr Sour acquired the rights then the exemption would be available on all the earlier disposals - the exemption would not be due when Mr Sour made a disposal of his rights.

Disposals before 9 April 2003

For disposals before 9 April 2003 the old TCGA92/S210 (2) provided that no chargeable gain accrued on a disposal of the rights, or an interest in the rights, under a life insurance policy or a deferred annuity contract. But the exemption did not apply where the person making the disposal

• was not the original beneficial owner under the terms of the policy, and
• had acquired the rights for a consideration in money or money's worth.

A person who acquired the rights under a policy by way of a gift would, therefore, be within the exemption. The payment of premiums under a policy by any person to whom the benefit of the policy is assigned relieved the previous policyholder of a liability. But this was not in itself regarded as the giving of consideration in money or money's worth for the acquisition of the rights.

The concept of the 'original beneficial owner' is not relevant for disposals on or after 9 April 2003, but for earlier disposals the following rules applied:

• Where, under a policy on the life of A, the proceeds were payable either to B or to the trustees of a fund for the benefit of B absolutely, the policy was exempt because B was the original beneficial owner. The existence of a reciprocal arrangement on these lines between partners did not affect this treatment.
• Where, under a policy on the life of A, the proceeds were payable to trustees for the benefit of B (if he survives A) but otherwise to Mrs A, neither B nor Mrs A was absolutely entitled to the benefit of the policy. The policy was, however, regarded as exempt because on the disposal it would be known who would benefit and the person who did benefit was, in these circumstances, regarded as the original beneficial owner. The existence of a reciprocal arrangement on these lines between partners did not affect this treatment.
• Where trustees took out a life insurance policy, in particular where they were seeking to protect themselves from a possible charge to Inheritance Tax, it could be accepted that they were the beneficial owners of the policy within the old TCGA92/S210 (2).