Development of policyholder taxation: historical
Policy originally focused on tax relief for payments of life assurance premiums, lifeassurance being regarded as a Good Thing, rather than on taxing gains. But this was beforelife assurance was developed as an investment medium along with its protection element.
Life assurance premium relief was part of the original income tax code introduced byWilliam Pitt, the Younger, in 1799 to help fund the Napoleonic Wars. The code was largelyrecast by Addington in 1803 when familiar concepts such as deduction of tax at source andthe schedular system were introduced. Income tax was abolished in 1816, following thedefeat of Napoleon, but reintroduced by Sir Robert Peel in 1842, as he inherited both agrowing budget deficit and a healthy parliamentary majority.
Gladstone, in a famous near 5 hour budget speech in 1853 made significant changes to thecode of what he called “Peels giant called forth from repose, prompted inpart by the need to raise funds for the Crimean War. It was section 54 of the 1853 FinanceAct that reintroduced relief on life assurance premiums and payments to secure deferredannuities. That Act contains the restriction to one sixth of total income still on thestatute book to this day, ICTA88/S274, see IPTM2130.
Relief for premium payments to life offices and friendly societies was statutory. Relieffor the death benefit element of trade union subscriptions was extended by concession in1916, recognising that the working classes were starting to be caught by a tax net widenedto pay for the Great War. It was not made statutory until 1978.
In Finance Act 1916, and Income Tax Act 1918, rules were introduced governing therelationship between premiums and capital sum assured, but until 1968 the proceeds fromlife assurance policies were outside the tax regime in the hands of the policyholder. Andsuch proceeds, in the hands of the original holder, were specifically exempted fromcapital gains tax when this was introduced in 1965.
The reliefs were important in the early days of PAYE, and described thus (taken from the1948-49 form P3):
Subject to certain restrictions, an allowance is due for
premiums paid on your life or your wifes life
premiums paid in connection with certain superannuation or pension schemes
those parts of your contributions to a trade union or friendly society which are for death or superannuation benefits.
Important restrictions were introduced by FA68. See IPTM1310.
FA76 laid the basis for life assurance premium relief by deduction, effective from1979-80. This relief was abolished by FA84/S72, for policies made, orvaried to increase the benefits or extend the term, after 13 March 1984, but thelegislation covering the trade union, certain friendly society reliefs and compulsorypurchase of deferred annuities, which were not given by deduction, survives. These reliefsare set out at IPTM2140, IPTM 2150 andIPTM2160. They are limited to small amounts and are not thesedays of great importance.
The provisions governing life assurance premium relief by deduction remain of considerablesignificance, and not only because the relief continues to run on old policies. This isbecause the legislation governing qualifying policies contained in ICTA88/S267and ICTA88/SCH15 is employed in the chargeableevents legislation introduced by FA68 as well as in determining whether a policy canattract premium relief.
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