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Standing Committee B
Thursday 22 May 2003
(Morning)
[Sir Nicholas Winterton in the Chair]
(Except Clauses 1, 4, 5, 9, 14, 22, 42, 56, 57, 124, 130 to 135, 138, 139, 148 and 184 and Schedules 5, 6, 19 and 25, and any new Clauses and Schedules tabled by Friday 9th May 2003 relating to excise duty on spirits or R&D tax credits for oil exploration.)
8.55 am
The Chairman: May I welcome all members of the Committee to the penultimate sitting before we have a short break? I regret that I will not be in the Chair this afternoon, so I wish everyone, particularly those who have been working extremely hard during the sittings we have had so far, a restful and enjoyable spring recess. We sat late on Tuesday, but I am sure that we will make further progress today. Clause 170
Policies of life insurance etc:
miscellaneous amendments
Question proposed, That the clause stand part of the Bill.
The Economic Secretary to the Treasury (John Healey): The clause introduces the four measures in schedule 34 and provides that they take effect from Budget day. They all relate to the way in which gains from life policies are taxed in the hands of the policyholder. The clause and schedule contain a number of beneficial measures affecting the taxation of gains from life assurance. They provide new exemptions, while correcting some anomalies and closing some loopholes.
Part 1 of schedule 34 deals with group policies: policies that insure the life of more than one person and pay benefits on the death of the persons whose lives are insured under the policy. Part 2 deals with charitable and non-charitable trusts. Part 3 contains a minor amendment applying only to annuities issued to friendly societies. Part 4 repeals, subject to transitional provisions, the rule that enables the owner of a life insurance policy to defer tax by allowing a policy to mature and reinvesting the proceeds in a new policy instead of extending the term of the old policy.
The changes in the clause and schedule represent some tidying up of the special regime for taxing gains from life policies. When it has been possible to consult the industry, we have done so to ensure that the changes meet the industry's concerns. Consequently, many of the changes proposed in the clause and schedule are welcomed by the industry. That is particularly true of the new exemptions for group policies, which the industry has sought for some time. The new exemption is the main change provided for by the clause and schedule.
Mr. Howard Flight (Arundel and South Downs): Sir Nicholas, may I welcome you to chairing our sitting this morning and wish you a restful break?
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As the Economic Secretary commented, in principle the industry welcomes the exclusion of group life policies from chargeable events, which is the main issue in the clause. The Law Society and others have raised some aspects for clarification and discussion relating to the pertaining conditions. Our coming amendments relate to those aspects. First, we want to clarify whether sums paid to a partnership for its benefit should be regarded as belonging to the individual's beneficiary. Secondly, we want to find out why, in principle, a charity that has a life policy gain should pay tax on it when it would be exempt from capital gains tax if it had arisen in the individual's hands. Thirdly, we want to focus on the disparity of treatment between charities according to their constitution and whether they are trusts, companies or associations—using ''charities'' in its loosest sense.
The new exemption for gains on some closely defined group life policies in section 539A of the 1988 Act appears to exclude policies in which the beneficiaries are any person other than individuals or charities, and policies in which one is insured for life benefit on the death of another by virtue of any right that is related to his being one of the insured lives. There are frequently policies in pension schemes—I recollect that the arrangements are thus for Members of Parliament—where individuals are invited to nominate whether they want their spouses or partners or children to benefit on their death. Would that be affected in any way by the provisions?
No reason is given for the restrictions that could significantly inhibit the value for exemption. For example, how is the insurer or anyone else to know whether a real trust created by an insured life will meet the conditions for exemption, and why should the exemption not apply to a group policy on the lives of members of the partnership with the firm as a beneficiary? Again, there is a practical point to be made, which is that partnerships, as with companies, will often want key man insurance that may be structured in that way, it being crucial that the partnership should benefit from the key man insurance.
John Healey: We will deal with the question whether the provisions should apply to partnerships of firms when we come to debate the relevant amendments to the schedule. On the other question that the hon. Member for Arundel and South Downs (Mr. Flight) posed about whether the clause will have an impact on nominated beneficiaries—he cited the parliamentary scheme—the answer to that is no.
Question put and agreed to.
Clause 170 ordered to stand part of the Bill.
Schedule 34
Policies of life insurance etc:
miscellaneous amendments
Mr. Flight: I beg to move amendment No. 140, in
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{**?h=1.5pt**}(b) a trustee or other person who does not have power to secure that the sums or other benefits are paid to or for, or conferred on, or applied in favour of, any person other than one or more individuals and/or charities beneficially.'.
The Chairman: With this it will be convenient to discuss the following:
Amendment No. 141, in
Amendment No. 155, in
Mr. Flight: These and forthcoming amendments essentially pick up on the points of principle that I have raised. Amendments Nos. 140 and 141 would avoid making the conditions unnecessarily rigid and unsuited to typical circumstances, and would make the conditions reflect the intention in the explanatory notes and new subsection (7). Benefits under a group life policy will typically be held under flexible trusts allowing the ultimate beneficiaries to be selected after the death of a given life assured. The present wording fails to cover the position in which someone might desire part of the sum in question to be paid to a charity and the remainder to an individual. The amendment would clarify, without needing to rely on the Interpretation Act 1978, that the condition is satisfied when more than one individual or charity is involved.
Amendment No. 155 would better reflect the intention evident in the explanatory notes, and would protect partnership life group policies from being left within the charge that the provisions otherwise exclude.
John Healey: The measures in part 1 of the schedule ensure that, provided certain conditions are met, the group life policy will be entirely outside the scope of the special regime for taxing policyholders on the gains that they make on their life insurance policies. The aim of amendments Nos. 141 and 155 is to extend the scope of the exclusion to group policies providing for payment to partnerships on the death of the individual partners. The hon. Member for Arundel and South Downs has explained that the Law Society advocates the amendment. That is understandable, because the big professional partnerships—particularly lawyers and accountancy partnerships—would take advantage of the exclusion were it implemented.
Amendment No. 140 would replicate the Interpretation Act 1978. It is intended to help individuals who are covered under group life policies, which provide death benefits to their families, dependants and others. Group life cover is broadly in line with the cover provided within approved pension schemes. It is not intended or designed to cover payments, particularly commercial
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arrangements, of the kind that the hon. Gentleman discussed. Policies in which the beneficiary on death is the partnership to which the deceased belonged are not within the category of group policies, and it is therefore inappropriate to widen the scope of the measure to include them.
I hope that the hon. Gentleman will withdraw the amendment; if not, I must ask my hon. Friends to reject it.
Mr. Flight: The Economic Secretary's argument is unclear. It is one thing to say that such a policy would not be used by a partnership. It is entirely different to say that the clause is specifically designed to exclude partnerships benefiting from the key man insurance of one of their partners, which is unreasonable. The Government have encouraged the use of limited partnerships as an alternative to a corporate structure. Like a company, a limited partnership faces severe risks if a key person working within it dies and their earnings cease. I cannot see any reason why a limited partnership should not have key man insurance in a fair and tax-efficient fashion. Will the Economic Secretary clarify his comments?
John Healey: The provisions in the clause and the schedule are not designed to include such partnerships, because the policy purpose behind the provision is to provide the exemption, which will assist group life policies that provide death benefits to families, dependants and others. It is not designed to incorporate the commercial partnerships in which the hon. Gentleman is interested.
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