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Life insurance policies and commission arrangements

Arrangements to avoid income tax on investment income by using life insurance policy commission have been closed from today.

Typically, an investor would invest in a life assurance policy and the provider would rebate the commission to the investor. HMRC practice in these circumstances has usually been to treat the commission as a tax free receipt. The investor would encash the bond when its value was only a little greater than the initial premium paid so that most of the return came in the form of tax free commission rather than a taxable gain on the policy.

The law will be amended to put it beyond doubt that the gain on the policy is calculated on the real cost to the investor net of any commission. The new rules will apply to short to medium term life policies issued on or after today where the investor invests more than £100,000 in any year.