IPTM2076 - Restricted relief qualifying policies

ICTA88/SCH15/PARAA2

A restricted relief qualifying policy (“RRQP”) is a qualifying policy that will not have full tax relief when a chargeable event occurs.

A qualifying policy becomes a RRQP where:

  • a qualifying policy is issued on or after 21 March 2012 and before 6 April 2013 where the beneficiary under the policy is in breach of the annual premium limit of £3,600 in any 12 month period.
  • an excluded assignment, other than those assignments that have no effect on the qualifying status of a policy (see IPTM2081), takes place on or after 6 April 2013 of a qualifying policy issued before 21 March 2012 where the assignment results in the assignee being in breach of their annual premium limit
  • a qualifying policy issued on or after 21 March 2012 is varied before 6 April 2013 such that the premium period is or could be lengthened or the total premiums increased and the beneficiary is in breach of the annual premium limit.
  • a variation (see IPTM2080) on or after 21 March 2012 of a qualifying policy issued before 21 March 2012 where that modification results in the premium period being lengthened or the total premiums increased and the beneficiary is in breach of the annual premium limit. This will also be the case if the premium period or premiums payable are decreased on or after 6 April 2013 for a qualifying policy issued before 21 March 2012.
  • following a deceased beneficiary event (see IPTM2081) on or after 6 April 2013 where the new beneficiary is in breach of the premium limit and the policy was issued before 21 March 2012.

There is an exception for the variation, or the exercise of an option, under an endowment policy that is a protected policy. A premium limit event does not occur in relation to such a policy if the policy has the sole purpose of ensuring the borrower under an interest only mortgage can repay the principal lent and the variation, or exercise of an option, is undertaken for this sole purpose. See ICTA88/SCH15/PARAA2(12).

Effect of a policy becoming a RRQP

ITTOIA05/S463A

The policy attracts full relief for the period up to the date that it becomes a RRQP (or, if later, 5 April 2013). From that date relief is restricted to the balance of the annual premium limit not used up by other qualifying policies.

The gain liable to tax is calculated by reducing the gain by G x TAP/TP

Where:

  • G is the amount of the gain
  • TAP is the total amount of allowable premiums
  • TP is the total amount of premiums payable under the policy

See IPTM2077 for an example of this calculation.

Assignment of (or a deceased beneficiary event under) a RRQP

Where a RRQP is assigned on or after 6 April 2013, and the assignment is an excluded assignment (see IPTM2081):

  • The policy will remain a RRQP if the assignee is not in breach of the annual premium limit.
  • ·The policy will become non-qualifying if the assignee is in breach of the annual premium limit.

Where a RRQP has a deceased beneficiary event on or after 6 April 2013 (see IPTM2081):

  • The policy will remain a RRQP if the new beneficiary is not in breach of the annual premium limit.
  • The policy will become non-qualifying if the new beneficiary is in breach of the annual premium limit.
  • If the policy remains a RRQP following the assignment or deceased beneficiary event, relief is still only available up to the date the policy became RRQP.
Example

Colin takes out a qualifying policy (QP) on 1 January 2012 for a premium of £2,400 per year. Colin then takes out a further QP on 1 January 2013 for a premium of £1,800 per year. As this policy is taken out after 21 March 2012 and before 6 April 2013 this is a RRQP. Therefore from 6 April 2013 relief is restricted to £1,200/annum (£3,600 less £2,400 relieved on the first policy).

On 1 January 2015 Colin decides to increase the premium under the first policy to £3,000 per year. As this is a variation of a qualifying policy issued before 21 March 2012 and Colin has exceeded the annual premium limit, this policy becomes a RRQP.

On 1 January 2016 Colin assigns the first policy to Barry. As Barry does not own any other relevant qualifying policies he confirms on the declaration that he has not breached the premium limit and therefore the policy remains a RRQP.

On 1 January 2020 the policy matures for a gain of £30,000. The allowable premiums are calculated as follows:

1 January 2012 to 1 January 2015 = £2,400 x 3 = £7,200

1 January 2015 to 1 January 2016 = £1,800* (see below)

1 January 2016 to 1 January 2020 = £3,000 x 4 = £12,000

*Total relevant premiums at 1 January 2015 are £4,800, meaning there is no relief for £4,800 - £3,600 = £1,200 of premiums payable. Relief is available for £3,600 - £1,800 (payable under policy B) = £1,800 relief for policy A, per ITTOIA05/S463B(10).