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Changes to qualifying policy rules

The Budget on 21 March 2012 introduced important changes to tax rules around qualifying policies. Here is a summary of the changes and how they affect new and existing policies.

The change

  • From 6 April 2013 new qualifying policies have a premium limit of £3,600 a year per beneficial owner (see note 2).
  • This limit is aggregated across all qualifying policies that fall under the new rules which are beneficially owned by the same individual.
  • Where an individual holds more than one affected policy, if they exceed the limit, the policy or policies that take the premium over the £3,600 a year limit will be fully non-qualifying if taken out after 20 March 2012.

Transitional period

  • Policies started between 21 March 2012 and 5 April 2013 will continue to be qualifying, with no premium restriction but if their premiums exceed £3,600 per year they will be known as Restricted Relief Qualifying Policies (RRQP). This means from 6 April 2013, the tax advantages of these policies will be restricted to the gains arising from the first £3,600 a year of premiums. However, where premiums are less than £3,600 per year and are then increased to more than £3,600 per year on or after 6 April 2013 the policy will become fully non-qualifying from the date of the increase.
  • Policies started before 21 March 2012 will be brought into the new rules if any policy options have been or are exercised after 20 March 2012. This includes partial surrenders made from the policy, most assignments and the death of the beneficial owner. Where their premiums exceed £3,600 per year (together with other policies under the new rules) these policies will also be known as Restricted Relief Qualifying Policies.
  • Policies in force before 6 April 2013 that are subject to the new rules will need to be included when considering the £3,600 premium limit.

Policies affected

  • All qualifying policies (whole of life or endowments) taken out on or after 21 March 2012.
  • Any qualifying policy in force before 21 March 2012 where a policy option is exercised after 20 March 2012 and their premium exceeds £3,600 p.a. on their own or with other qualifying policies under the new rules.

Policies not affected

  • Qualifying policies in force before 21 March 2012 which are not changed after 20 March 2012. These are ‘protected policies’.

The Rule Changes mean

  • New policies starting on or after 6 April 2013 cannot be qualifying policies if the aggregated premium per beneficial owner exceeds the £3,600 a year limit.
  • The qualifying premiums on all qualifying policies falling under the new rules will be subject to a premium cap of £3,600 a year from 6 April 2013.
  • Gains arising from premiums in excess of the cap from that date will be subject to chargeable gains taxation.
  • Where premiums are increased to more than £3,600 on any policy issued after 20 March 2012 any time after 6 April 2013 the policy will become fully non-qualifying from the date of increase.
  • Premiums accrued into qualifying policies during the transitional period will remain qualifying.
  • Any qualifying policies that started before 21 March 2012 that have options exercised will fall within the new capped regime from 6 April 2013. These policies can continue to have their premium levels increased without impacting qualifying status if they remain below £3,600 per annum. If premiums increase to more than £3,600 per annum, benefits accrued before 6 April 2013 and benefits derived from the first £3,600 per year premium thereafter will remain qualifying.
  • Any qualifying policy starting on or after 6 April 2013 whose premiums take the total yearly payments into all qualifying policies (that are subject to the new rules) over the £3,600 cap will be entirely non-qualifying and any gains from it will be taxable.
  • Where premiums paid to qualifying policies that are subject to the new rules (aggregated with any other qualifying policies subject to the new rules) remain below £3,600 a year, there is no impact.
  • For qualifying policies issued after 20 March 2012, where premiums paid (aggregated with any other qualifying policies subject to the new rules) remain below £3,600 a year, they will continue to be fully qualifying.
  • Assignment of a policy will cause that policy to become fully non-qualifying from the date of the assignment unless it is an excluded assignment. An excluded assignment will cause a policy to be tested against the premium limit of the new beneficial owner (Note 1).
  • Assignment of a policy in connection with security on a debt or discharge of a debt will not affect the policy in any way.
  • If a policy is jointly owned the full premium of the policy will count towards each policyholder’s limit.
  • Where a policy is held under trust the beneficial owner (see Note 2) is the creator of the trust in the case of Discretionary or Flexible Trusts and the absolute beneficiary in the case of an absolute trust.
  • Normal chargeable event rules will apply, including top-slicing which means that, even where a chargeable gain arises, any tax liability will be dependent on the beneficial owner’s tax position at the time.
  • Where a chargeable event arises the chargeable event certificate will show the full gain as if the policy was non-qualifying from inception. Relief for qualifying premiums must be applied for through self-assessment in the same way as top-slicing and time-apportionment.
  • Premiums maintained for the sole purpose of paying off an interest-only mortgage will be protected.
  • Any part of the premium that pays for waiver of premium is ignored for premium limit purposes.
  • A Statement must be made by the beneficial owner of a policy within 3 months of any premium limit event, variation, assignment or the death of a beneficial owner.
  • When a beneficial owner dies the policy must be retested against the premium limit in the hands of the new beneficial owner. This is not required where the new beneficial owner was previously a joint beneficial owner.
  • Contractual automatic increases will not affect the qualifying status of a policy.

Changes to Old Mutual Wealth qualifying policies that would automatically bring them under the new rules

  • A premium variation.
  • Exercise of the extension option.
  • A partial encashment across all policies.
  • Some assignments.
  • Death of a beneficial owner.

Note 1 (excluded assignments)

The Government has decided that the following assignments should not result in automatic loss of qualifying policy status: The policies will become RRQPs and subject to retesting against the new beneficial owner’s premium limit.

  • Assignments as part of a divorce settlement.
  • Assignments as a result of a court order.
  • Assignments between husband/wife and between civil partners.
  • Assignments into and out of trust.
  • Assignment to and from legal personal representatives.

Assignments that have no effect on qualifying status

  • Assignment by way of security for a debt.
  • Assignment by way of discharge of a debt.

All other assignments will result in the policy becoming fully non-qualifying from the date of the assignment.

Note 2 (Beneficial owner)

An individual will be a beneficiary under a policy if he/she beneficially owns any rights under a policy or any share in any rights under a policy. An individual will also be considered a beneficiary under a policy if any rights under the policy are held on non-charitable trust created by that individual and there is otherwise no individual that is a beneficial owner.

What it means at a glance

  Policy issued post 5 April 2013 Policy issued from 21 March 2012 to 5 April 2013 Policy issued pre 21 March 2012
Initial qualifying status Either a fully qualifying policy (if within £3,600 p.a.) or a fully non qualifying policy (if over £3,600 p.a.). Qualifying policy until 5 April 2013. From 6 April 2013 is a Restricted Relief Qualifying Policy (RRQP) if over the allowable premium limit. Protected Policy, not subject to premium limit.
If changes* are made from 21 March 2012 to 5 April 2013

n/a

Status unaffected. If premium is varied the policy will become an RRQP if over the allowable premium limit after 5 April 2013. All premiums paid before that date will be fully qualifying.
Treatment on or after 6 April 2013 Either a fully qualifying or fully non qualifying policy. Future premiums up to £3,600 p.a. will be qualifying. Future premiums in excess of £3,600 pa will be non-qualifying. All these (transitional) policies will be subject to future retesting against the premium limit. • If changes were made between 21 March 2012 & 5 April 2013, premiums up to £3,600 pa will be qualifying. Future premiums in excess of £3,600 pa will be non-qualifying.
• If no changes were made between 21 March 2012 & 5 April 2013 the policy remains “Protected” regardless of the level of premium.
If changes** are made after 5 April 2013 If the change** results in the premium being increased to more than £3,600 pa the policy will become fully non-qualifying. • Premiums up to £3,600 pa will be qualifying. Premiums in excess of £3,600 pa will be non-qualifying.
• If no changes are made after 20 March 2012 the policy remains “Protected” regardless of the level of premium.
Statement required On application and on any subsequent increase, extension of premium paying term, assignment or death of beneficial owner. On any increase, extension of premium paying term, assignment or death of beneficial owner.
Annual premium limit applies 1. To premiums due and payable in any period of 12 months
2. To a beneficial owner of a policy.
Joint policyholders*** Full premium will apply to each policyholder’s limit. For polocies under the new rules the full premium will apply to each policyholder’s limit.
Assignment of a qualifying policy after 5 April 2013 Other than where an ‘excluded assignment’ **** is executed, any qualifying policy that is assigned will become fully non-qualifying after the assignment. If it is an excluded assignment the policy will need to be retested against the premium limit of the new beneficial owner. Assignments in connection with a debt will not be affected by the new rules.
Endowment linked to a mortgage

n/a

Mortgage-linked policies that are modified to meet their original target value will be excluded from the premium limit rules.
Change of life assured

n/a

Change of life assured is not a premium limit event (only applicable to Old Mutual Wealth pre ’88 policies).


Changes (from 21 March 2012 to 5 April 2013)

Any change in premium level
Extension of term
Partial surrender

** Changes (on or after 6 April 2013)

Any change in premium level
Extension of term
Partial surrender
Assignment
Death of beneficial owner

*** Joint Policyholders

Joint policyholders have joint beneficial ownership of a policy.
Note: Beneficial ownership
Where a policy is under a discretionary or flexible trust the beneficial owner is the settlor
Where a policy is under an absolute/bare trust the beneficial owner is the beneficiary

**** Excluded Assignments

The following assignments should not result in automatic loss of qualifying policy status.

  • Assignment as part of a divorce settlement.
  • Assignment as a result of a court order.
  • Assignment between spouses or civil partners.
  • Assignment into trust.
  • Assignment out of trust.
  • Assignment to and from legal personal representatives.

Assignments that have no effect on qualifying status

  • Assignment by way of security for a debt.
  • Assignment by way of discharge of a debt.

The effect of changes and events on Old Mutual Wealth Policies

  Date of event MIP SEP & CAP TSP PPP
Issue of policy 21 March 2012 to 5 April 2013 Issued as qualifying or if premiums over £3,600 pa as RRQP.

n/a

Issued as qualifying or if premiums over £3,600 pa as RRQP.

n/a

  After 5 April 2013

n/a

Exercise of non-contractual increase option 21 March 2012 to 5 April 2013

Remains qualifying if premiums below £3,600 pa; or becomes, or remains, RRQP if premiums over £3,600 pa.

  After 5 April 2013

n/a

Remains qualifying if premiums below £3,600 pa; or becomes, or remains, RRQP if premiums over £3,600 pa; or becomes non-qualifying if policy issued after 20 March 2012 and increase takes premiums over £3,600 pa limit. Remains qualifying if premiums below £3,600 pa; or becomes, or remains, RRQP if premiums over £3,600 pa.
Contractual automatic Increase 21 March 2012 to 5 April 2013

n/a

Not affected by new rules.

n/a

  After 5 April 2013

n/a

Not affected by new rules.

n/a

Exercise of decrease option 21 March 2012 to 5 April 2013 Remains, or becomes, qualifying if premiums below £3,600 pa; or becomes, or remains, RRQP if premiums remain over £3,600 pa.

n/a

Not affected by new rules.

n/a

  After 5 April 2013 Remains, or becomes, qualifying if premiums below £3,600 pa; or becomes, or remains, RRQP if premiums remain over £3,600 pa.

n/a

Not affected by new rules.

n/a

Exercise of extension option 21 March 2012 to 5 April 2013 Remains qualifying if premiums below £3,600 pa; or becomes, or remains, RRQP if premiums over £3,600 pa.

n/a

  After 5 April 2013 Remains qualifying if premiums below £3,600 pa; or becomes, or remains, RRQP if premiums over £3,600 pa.

n/a

Partial surrender across all policies 21 March 2012 to 5 April 2013 Remains qualifying if premiums below £3,600 pa; or becomes, or remains, RRQP RRQP if premiums above £3,600 pa.

n/a

  After 5 April 2013 Remains qualifying if premiums below £3,600 pa; or becomes, or remains, RRQP if premiums above £3,600 pa.

n/a

Allowed assignment 21 March 2012 to 5 April 2013

Not affected by new rules.

  After 5 April 2013

Not affected by new rules.

Excluded Assignment 21 March 2012 to 5 April 2013

Not affected by new rules.

  After 5 April 2013 Must be retested against new owner’s premium limit to determine whether policy is qualifying or RRQP.
Non- allowed/excluded assignment 21 March 2012 to 5 April 2013

Not affected by new rules.

  After 5 April 2013

Non-qualifying.

Death of beneficial owner 21 March 2012 to 5 April 2013

Not affected by new rules.

  After 5 April 2013 Must be retested against new owner’s premium limit. Not required where new beneficial owner was previously a joint owner.

The new rules are currently included in the Finance Bill 2013. This is Old Mutual Wealth’s current understanding of the impact of the changes to the Qualifying Policy rules as at the date at the top of this article and we believe this understanding to be correct but cannot guarantee it.

Please note, neither Old Mutual Wealth nor its employees are authorised to provide tax or legal advice and we cannot accept responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

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