What does section 500(c) of ITTOIA 2005 do regarding insurer loans?

Section 500(c) of the Income Tax (Trading and Other Income) Act 2005 treats a loan made by an insurer to a policyholder in connection with a life insurance policy as a part surrender of that policy. This part surrender can give rise to a chargeable event gain, potentially resulting in an income tax liability for the policyholder.

Which policies are exempt from section 500(c) treatment?

Policies issued in respect of insurances made before 27th March 1974 and contracts made before that date are exempt. For these older arrangements, any loan from the insurer is not treated as a part surrender, so no chargeable event gain arises under section 500(c) of ITTOIA 2005.

Why does the pre-27th March 1974 exemption exist?

The exemption is a transitional protection or grandfathering provision. It ensures that policyholders who took out life insurance policies or entered into contracts before the relevant legislation came into effect are not retrospectively disadvantaged by tax rules introduced after their arrangements were already in place.

What is the practical effect of the pre-1974 exemption on insurer loans?

If a policyholder holds a policy or contract originating before 27th March 1974, any loan received from the insurer in connection with that policy does not trigger income tax as a part surrender event. By contrast, loans on policies made after that date are treated as part surrenders and may generate chargeable event gains.

Income Tax (Trading and Other Income) Act 2005 section 500(c)

Pre-27th March 1974 policies and contracts: disapplication of section 500(c)

Section 500(c) provides that certain older life insurance policies and contracts are exempt from the rule that treats a loan made by an insurer as a partial surrender of a policy.

Section 500(c) treats a loan made by an insurer to a policyholder as a part surrender of the policy, which can trigger a chargeable event gain.
This part surrender treatment does not apply to policies issued in respect of insurances made before 27th March 1974.
The exemption also covers contracts made before 27th March 1974.
This grandfathering provision protects holders of older policies and contracts from a tax charge that was introduced after their arrangements were already in place.

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