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Time apportionment relief changes

The aim of this document is to provide an overview of the changes to time apportionment relief which were implemented in the Finance Act 2013.

What is the aim of the changes to time apportionment relief?

The aim of the changes to time apportionment relief is to ensure:

  • a more consistent approach is adopted by insurers inside and outside the UK;
  • a more appropriate reduction to gains is used;
  • the rules align with the new statutory definition of residence and changes to the basic calculation of chargeable event gains included in the Finance Act 2012. 

What is time apportionment relief?

Time apportionment relief is used to reduce a chargeable event gain. It allows the chargeable gain to be proportionately reduced by the amount of time the policyholder has been resident outside the UK during the term of the policy.

So for example – if a policyholder has been outside the UK for 25% of the time the policy has been held and subsequently becomes UK tax resident any chargeable event gain will be reduced by 25%. This current calculation method is explained in our “Chargeable event gain and the interaction with time appointment relief article”.

How does time apportionment relief currently apply?

  • Time apportionment relief currently only applies to individuals who hold a life assurance or a capital redemption bond issued by an insurer outside the UK – these bonds are generally referred to as “offshore bonds”.
  • The legislation dealing with time appointment is found in section 528 Income Tax (Trading and other Income) Act 2005 (‘ITTOIA’); and subsection (1) states that ‘the gain from a foreign policy of life insurance or foreign capital redemption policy is reduced for the purposes of this Chapter if the policy holder was not UK resident throughout the policy period’. The use of the word ‘policyholder’ in this context has been the source of much debate.  Since the legislation simply refers to ‘policyholder’ it is Old Mutual’s view that ‘policyholder’ means all policyholders and therefore time apportionment can be used in respect of any policyholder who has owned the bond.  So for example if a policy is assigned from a non-UK resident individual to a UK resident individual, that individual could benefit from the original owners period of non-residence. The current time appointment calculation treats all premiums paid into a policy as paid at inception, this keeps the calculation simple.

What changes have been announced in the Finance  Act 2013?

  • The rules have been extended to allow time apportionment relief for individuals holding life assurance bonds issued by insurers inside the UK “onshore bonds”
  • Time appointment relief will be based on the residence history of the person liable to income tax on the gains – rather than the legal owner, where different. 
  • Time appointment will be limited to the residency of the current owner only but double taxation relief or unilateral credit relief can be claimed where tax has already been paid by the previous owner when they were non-UK resident.  So in the example above, double taxation relief could be claimed if the original policyholder paid tax when he was non-UK resident. The only exception to this rule is where there is a gift assignment between spouses or civil partners living together, where time apportionment relief can be used on the residency of the current and previous owner. Further information on this is provided below.
  • The time apportionment calculation has been revised in the following manner to achieve this:

- A ‘material interest period’ as defined in new Section 528(4) of ITTOIA for a living individual and Section 528(A) of ITTOIA for a deceased person has been introduced which in essence ensures that time apportioned reductions can only be used for periods when the policyholder owns the policy, unless a gift assignment is made between spouses and civil partners living together (in accordance with Sections 528(9) and (10) of ITTOIA).  

- New sections 528(5) and 528A of ITTOIA in essence ensure that the meaning of material interest period includes references to a share of those rights to allow each Policyholder to claim time apportionment relief in respect of their share of the gain.

- From 6 April 2013, when the new statutory residence test applies, time apportionment relief and top slicing relief will still be available to UK resident taxpayers following a period of temporary non residence.

- New section 536(7) of ITTOIA provides that time apportioned reductions will be available to policies issued by UK insurers and insurers outside the UK. It also ensures that in calculating top-slicing relief, the number of complete years for which the policy has run before the chargeable event occurs will be reduced by the number of complete years in the ‘material interest period’ that the individual was non-UK resident.

What does this mean in practice?

The formula for time apportionment now includes reference to a material interest period as follows:

Gross gain x A*/B** = Time apportionment relief. 

Gross gain – Time Apportionment relief = Gain tax liability due on.  

* the number of days in the material interest period when the individual is not UK resident, and 

** the number of days in the policy period (which is the period for which the policy has run before the chargeable event occurs)

These changes are best illustrated by examples as below.  

Example 1 - Onshore Bond & Time Apportionment

Mr Jones is resident in the UK and invests in an Investment Bond with Old Mutual Wealth on 10 April 2015. He later decides to take a 14 month role with his company in Singapore. A few months after his return to the UK, his daughter announces that she is getting married.  Mr Jones decides to surrender his bond to pay for the wedding, whereupon there is a gain of £10,000. Assuming he has held the Investment Bond for 1095 days, and had been non UK tax resident for 425 days then in determining the reduction of the gain the calculation is as follows: 

Gross gain x A*/B** = Time apportionment relief 

Gross gain – Time Apportionment relief = Gain tax liability due on    

Gross gain (£10,000) x 425*/1095** = £3881.27 time apportionment relief, so the net gain is £10,000 - £3881.27 = £6118.73 

* Number of days in the material interest period when Mr Jones was not UK tax resident 
** Number of days in the policy period (Period it has been in force before the chargeable event occurs)

Example 2 – Assignment made between spouses or civil partners living together

Mr and Mrs Peters are resident in the UK. Mr Peters is the policyholder of an Investment Bond held with  Old Mutual International Isle of Man. Mr Peters is now retired but had lived and worked outside the UK for a period of time.      

As he is a higher rate taxpayer and his wife has a nominal income, he decides to assign the  Investment Bond to her.

Mrs Peters decides to surrender the bond, whereupon there is a gain of £50,000. As Mr Peters was living with Mrs Peters when the assignment was made, this gain can be reduced by using time apportionment based on the number of days that Mr Peters had been non-UK tax resident whilst also the policyholder. Assuming Mr Peters had held the Investment Bond for 3200 days and was non-UK resident for 500 of these and that Mrs Peters surrendered the bond immediately then the calculation is as follows: -

Gross gain x A*/B** = Time apportionment relief 

Gross gain – Time Apportionment relief = Gain tax liability due on    

Gross gain (£50,000) x  500*/3200** = £7812.50 time apportionment relief, so the net gain is £50,000 - £7,812.50 = £42,187.50 

* Number of days resident in the material interest period when Mr Peters was not UK tax resident 

** Number of days in the policy period (Period it has been inforce before the chargeable event occurs) 

Example 3 – Assignments made between other parties (including spouses or civil partners not living together)

Mr Smith is resident in Hong Kong whilst his daughter Miss Susan Smith is resident in the UK.  Mr Smith is the policyholder of an Investment Bond held with Old Mutual International Isle of Man.

Mr Smith decides to assign the Collective Investment Bond to his daughter to help her with a deposit for her first home. Miss Smith then subsequently surrenders the bond, whereupon there is a gain of £20,000. 

As Miss Smith has been UK tax resident throughout her period of ownership of the Investment Bond, then time apportionment relief will not apply. Instead, she may be able to claim double taxation relief for any tax paid by Mr Smith during his period of ownership of the bond.            

Example 4 – Deceased individual – Executors surrender Investment Bond

Mr Owen was born in England but had lived in Dubai for most of his life. When he retired he decided to return to England. Unfortunately, Mr Owen passed away a few months after his return to England.    

Mr Owen was the policyholder of an Investment Bond. His executors decide to surrender the bond, whereupon which there is a gain of £70,000. 

Assuming Mr Owen had held the Investment Bond for 3650 days, and was UK tax resident for 70 days, then in determining the reduction of the gain the calculation is as follows: 

Gross gain x A*/B** = Time apportionment relief

Gross gain – Time Apportionment relief = Gain tax liability due on   

Gross gain (£70,000) x  3580*/3650** = £68,657.53 time apportionment relief, so the net gain is £70,000 - £68,657.53 = £1342.47   

* Number of days in the material interest period when the deceased is not UK tax resident 
**Number of days in the policy period (Period it has been in force before the chargeable event occurs)

Example 5 – Deceased individual – UK tax resident trustees surrender Investment Bond

UK tax resident trustees can now use time apportionment relief where they are liable to gains following the death of a UK tax resident settlor who had been non UK tax resident during the material interest period.    

Mr Richard was UK tax resident when he died on 1 March 2015. He was the settlor of a discretionary trust which held  an Old Mutual International Isle of Man Investment Bond. The trustees decide to surrender the Investment Bond on 8 April 2015 whereupon there is a gain of £80,000. 

Assuming that the Investment Bond has been held for 4000 days, and that Mr Richards was UK tax resident for 390 days, then in determining the reduction of the gain the calculation is as follows: 

Gross gain x A*/B** = Time apportionment relief 

Gross gain – Time Apportionment relief = Gain tax liability due on    

Gross gain (£80,000) x  3610*/4000** = £72,200 time apportionment relief, so the net gain is £80,000 - £72,200 = £7800   

* Number of days in the material interest period when the deceased is not UK resident 

** Number of days in the policy period (Period it has been in force before the chargeable event occurs)

Example 5 – Top slicing calculation

Top slicing is still restricted to situations where the gain after time apportionment pushes the policyholder into the higher rate tax bracket. For example, where they would otherwise be a basic rate taxpayer, or where the gain pushes the policyholder into the additional rate tax bracket where they would otherwise be a higher rate taxpayer.

The number of relevant policy years for top-slicing relief has been revised so that it is now reduced by the number of complete policy years which the policyholder was not resident in the UK during the material interest period.  

Mr Williams has worked and lived in Dubai for a number of years. He is the policyholder of an Old Mutual Isle of Man Investment Bond. He is starting to get home sick and decides to return to England to retire. After being in the UK for 2 years he surrenders the bond to supplement his income, whereupon there is a gain of £50,000. 

Assuming Mr Williams has held the Investment Bond for 3100 days, and was UK tax resident for 730 days, then in determining the reduction of the gain the calculation is as follows: 

Gross gain x A*/B** = Time apportionment relief 

Gross gain – Time Apportionment relief = Gain tax liability due on    

Gross gain (£50,000) x  2370*/3100** = £38,225.80 time apportionment relief, so the net gain is £50,000 - £38,225.80 = £11774.20

Assuming that the number of years for top slicing purposes would normally be 8, then as the client was non UK resident for 6 years, only 2 years can be used for top slicing purposes.  

* Number of days in the material interest period when the deceased is not UK tax resident 
** Number of days in the policy period (Period it has been in force before the chargeable event occurs)

How is this impacted by the statutory residence review  undertaken by HMRC?

The statutory definition of residence for individuals has also been included in the Finance  Act 2013.  The new definition includes an anti-avoidance rule under which gains arising during a temporary period of residence outside the UK will be treated as income arising in the year of the policyholders return to the UK. 

This new provision interacts with the rules for time apportioned reductions, so that the reductions will apply to temporary periods of non-residence.

Therefore, the reviews should be read in conjunctions with each other. 

What is the impact on new policies and existing policyholders?

The changes to time apportioned reductions detailed in this article apply to any new life assurance or capital redemption contract made on or after 6 April 2013. 

The changes will only apply to life assurance or capital redemption contracts in existence before 6 April 2013, if after 6 April 2013 the contract is either:

    1. varied so as to increase the benefits secured – This includes both an exercise or right conferred on the contract and also an increase to the benefits secured to connected policies within the meaning of 473(A) ITTOIA; or .
    2. there is an assignment (includes both gift assignments and gifts for money or moneys worth) of the rights or some of the rights conferred on the contract to the individual or deceased; or
    3. some or all of the rights conferred on the contract become held as security for a debt of the individual or deceased.  

Will chargeable event certificates need to be changed?

No. However, this means that there may be occasions where the gain shown may need to be adjusted. HMRC is intending to produce additional guidance for policyholders to cover these situations.

The information provided in this article is not intended to offer advice.

It is based on Old Mutual Wealth's interpretation of the relevant law and is correct at the date shown at the top of this article. While we believe this interpretation to be correct, we cannot guarantee it. Old Mutual Wealth cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

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