Chapter LAM14040

Published date05 August 2019
Record NumberLAM14040
CourtHM Revenue & Customs

Background

The pre-FA12 regime treated protection business as BLAGAB. As a result, tax was based on investment income plus gains less expenses rather than on trading profit.

However, protection business is not a savings product, so applying the ‘I-E’ concept of taxing the policyholder investment return was not consistent with the objective of the regime. This treatment could create significant distortions in the tax charge. The expenses relating to these products were fully deductible in the I-E computation although the offsetting premium income was not. Some of these protection products, such as mortgage protection and payment protection products paid high commissions to intermediaries and generated significant tax deductions for expenses but relatively small amounts of investment income.

At the same time as the introduction of the new life tax regime, the treatment of protection business was changed from BLAGAB to non-BLAGAB. This aligns it more closely with the taxation of other wholly risk based insurance products, such as general insurance policies, taxable on a normal trading basis.

Protection business is defined in FA12/S62 and is intended to include pure life insurance which pays out on death or incapacity. There are a number of conditions to the definition but the main element relates to contracts where:

“the benefits payable cannot exceed the amount of premiums paid except on death, or in respect of incapacity due to injury, sickness or other infirmity, and the contract is made on or after 1 January 2013”

In assessing the benefits test, the following are to be ignored:

  • non-cash inducements (such as small gifts) to enter into the contract;
  • excesses which are an insignificant proportion (although there is no guidance as to the threshold of insignificance); and
  • amounts only payable in highly unlikely circumstances

The new regime introduced in FA12 treats...

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