IPTM2060 - Qualifying policies and life assurance premium relief: endowments: redress for mis-selling

The following table sets out an analysis of the tax implications for 15 different types of redress for endowment mis-selling published by the Financial Ombudsman Service. It is based on a draft prepared by the Association of British Insurers (ABI) and agreed with HM Revenue & Customs. It should be regarded as a guide, and the facts of each individual case need to be considered.

-	Type of redress	Possible tax consequences
1	Comparison of endowment mortgage sold with an equivalent repayment mortgage - a cash settlement to the policyholder equal to any shortfall of the surrender value of the policy compared with position customer would have been in with an equivalent repayment mortgage	Where the insurer requires the policy to be surrendered the payment is considered to be by reason of the surrender, so should be added to the surrender proceeds and included in the gain calculation if the surrender constitutes a chargeable event. Where it is not a requirement to surrender then the payment is not by reason of the surrender, even if the policyholder does in fact choose to surrender the policy, so the amount of the redress is not chargeable under the chargeable events (CE) legislation. Where the policy continues the payment is not a surrender of rights under the policy. Where the payment of redress is not caught by the CE legislation, it is still a disposal of a right of action, which is a capital asset potentially triggering a chargeable gain (CG). However, although the CG legislation specifically excludes “compensation or damages for any wrong or injury suffered by an individual in his person”, paragraph 12 of ESCD33 makes clear that compensation for a financial loss is not within that provision. By accepting redress the complainant has disposed of a right of action for compensation. But as ESCD33 paragraph 10 allows a ’look through’ to the underlying asset and the disposal of a life policy by the original beneficial owner is not a chargeable disposal, TCGA92/S210, the redress payment will not be chargeable if received by that owner of the policy
2	Comparison of endowment mortgage sold with equivalent repayment mortgage over a shorter term	As type 1
3	Policy reconstruction with shorter term. Reprojection letter issued by insurer	Shortening the term of a qualifying policy is a significant variation - IPTM2030. The variation would not itself be a chargeable event. But the ’new’ policy would need to be tested against the qualifying rules – IPTM8165. For example, if there are less than 10 years to run, the policy will lose qualifying status if there is any increase in premiums
4	Extend term of mortgage - with lender’s consent	No tax consequences if the endowment policy is not itself extended
5	Policy amendments	Depends on nature of amendment. Enhancing the amount of the maturity or surrender benefit is likely to be a significant variation - more so for a unit linked policy than for with-profits. The insurer normally has more discretion to amend with-profits benefits. A significant variation would not itself be a chargeable event. But the ’new’ policy would need to be tested against the qualifying rules - see the discussion under type 3. The enhancement may increase the amount of future CE gain if the eventual surrender is a chargeable event. See also the discussion under types 9, 10 and 11
6	Reinstatement of ‘churned’ policy - meaning one replaced to earn fresh commission	This redress is typically employed where a further replacement policy is unsuitable. If the replacement policy is discontinued, the discontinuance may be a chargeable event. If the reinstated policy has been dormant for more than 13 months from the due date of the last premium paid then it cannot be resurrected as a qualifying policy. In this case, unless the resurrected policy when regarded as a new one qualifies in its own right from the date of reinstatement, it is likely to give rise to a chargeable event when it matures. There may be practical problems if the original policy and the one which replaced it were not with the same insurer
7	Reconstruction of replacement policy	As type 5
8	Refund of churned policy premiums plus interest from outset less the surrender value together with\ninterest to date\ncompensation for loss of any life assurance premium relief\ncompensation for extra premiums on new policy	Refund of policy premiums does not add to the surrender value of the policy if it is clearly on facts a refund. Compensation for loss of life assurance premium relief through raised allocation rates is regarded as a significant variation - see the discussion under type 3.The treatment of interest paid on compensation is dealt with by Tax Bulletin 72 (TB72). Compensation for extra premiums on the new policy is not within the CE legislation. As regards the CG treatment, see the discussion under type 1. Depending on the circumstances the entire amount of compensation, including the elements paid in consideration of the loss on the old policy, may amount to a potentially chargeable receipt under the CG legislation to which the relevant discussion under type 1 is applicable
9	Refund of churned policy premiums plus interest from outset less the surrender value together with interest to date	As relevant discussion under type 8
10	Cancel the effect of some or all of the policy charges	Topping up a continuing policy will have no immediate tax effect provided it does not involve a variation of the original contract terms. Any enhancement may increase the amount of future CE gain if the eventual surrender is a chargeable event. Payment of redress as a separate sum where the policy has been surrendered will be viewed by HMRC as additional surrender proceeds, giving rise to potential tax liability if the related surrender was itself a chargeable event. See also the discussion under type 1
11	Refund in respect of higher payments made through the operation of a low start option, replacing with level premiums from outset	Treatment will depend on precise wording of the insurance policy. If changes in premium level are accommodated as options or alternatives within the policy terms there will be no effect on qualifying status. If there are no such conditions there may be a significant variation - see the discussion under type 3. Discussion under type 8 applies to refund of premiums
12	Addition to policy of amount lost through investing in an inappropriate fund	See the relevant discussion under type 10
13	Refund of premiums plus interest	This usually arises as a result of a finding that the adviser has committed fraud for financial gain. It may, depending on the facts, be appropriate to treat the policy as void from the start. Only the interest is potentially chargeable in accordance with TB72. [DN: As above]. Type 8 discussion applies to refund
14	Refund of premiums plus interest, minus the cost of life cover	As type 13
15	Refund of incremented premiums plus interest	As type 11. Interest is potentially chargeable in accordance with TB72 [DN: As above]