How do chargeable event rules differ for qualifying life insurance policies taken out before 14th March 1989?

For qualifying policies issued before 14th March 1989, condition (b) of section 485(2) and (3) — concerning whether a company holds an interest in the policy rights — is disregarded. Only condition (a) needs to be considered when determining whether a chargeable event has occurred, resulting in fewer circumstances that can trigger an income tax charge.

When does a pre-14th March 1989 qualifying policy lose its favourable chargeable event treatment?

A pre-14th March 1989 policy loses its favourable treatment if it is varied on or after that date by either increasing the benefits secured or extending the term of the insurance. Once varied, the full chargeable event conditions, including the company interest condition (b), apply going forward to the policy.

Does exercising a right built into a qualifying policy count as a variation under section 485?

Yes. Any exercise of rights conferred by the policy counts as a variation for these purposes. Even if the option was always part of the original policy terms, exercising it — for example to increase cover or extend the term — brings the policy within the post-14th March 1989 rules and the wider chargeable event conditions.

What is the practical effect of section 485 schedule 2 paragraph 107 on older qualifying policies?

The practical effect is that older qualifying policies face a narrower set of circumstances triggering chargeable events, as the company interest condition is ignored. However, if the policyholder varies the policy by increasing benefits or extending the term, both conditions apply, widening the scope for potential income tax charges.

Income Tax (Trading and Other Income) Act 2005 section 485

Pre-14th March 1989 qualifying policies: application of section 485(2)(b) and (3)(b)

Section 485 schedule 2 paragraph 107 deals with how the chargeable event rules in section 485 apply differently to qualifying life insurance policies taken out before 14th March 1989, and when a pre-existing policy loses that favourable treatment due to later variations.

For qualifying policies issued before 14th March 1989, the chargeable event test in section 485(2) and (3) is simplified by removing the condition relating to a company having an interest in the policy rights.
A pre-14th March 1989 policy loses its favourable treatment if it is varied on or after that date to increase the benefits secured or to extend the term of the insurance.
Any exercise of rights conferred by a policy counts as a variation, potentially bringing the policy within the post-14th March 1989 rules.
The practical effect is that older qualifying policies are subject to fewer circumstances in which a chargeable event can arise, unless they are subsequently altered.

Access full legislation.And much more.

By becoming a member, your team gets full access to Tax World research tools and source-backed tax resources.

Become a member