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HM Revenue and Customs Brief 26/11


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Issued 27 July 2011

The Equitable Life Payment Scheme: tax and tax credit implications

What this brief covers

This brief explains the impact for taxes and tax credits of payments under the Equitable Life Payment Scheme (ELPS). It covers:

  • background to the scheme
  • how ELPS will work
  • tax and tax credit effects, including reporting requirements


The Coalition’s Programme for Government issued in May 2010 promised to implement the Parliamentary Ombudsman’s recommendation to make fair and transparent payments to Equitable Life policy holders, through an independent payment scheme, for their relative loss as a consequence of regulatory failure. On 20 October 2010 the Financial Secretary, Mark Hoban, announced in a written ministerial statement that £1.5 billion will be available for payment under ELPS. He also announced that the payments will be free of tax.

On 16 December 2010 the Equitable Life (Payments) Act 2010 came into force. The Act authorises the Treasury to incur expenditure when making ELPS payments and enables those payments to be made by National Savings and Investments (on the Treasury’s behalf). The Act also allows the Treasury to make an order to provide for ELPS payments to be free of tax and to disregard them for tax credit purposes.

A Statutory Instrument, the Taxation of Equitable Life (Payments) Order 2011, SI 2011 No 1502 (the SI), makes the necessary provision to exempt authorised payments under ELPS. The SI was made on 15 June 2011 and came into force the following day. The SI can be found by following the link below.

SI No 1502 2011 The Taxation of Equitable Life (Payments) Order 2011 (Opens new widnow)

How ELPS will work

The Treasury published full scheme design documentation on 16 May. A link to the full document ca be found by following the link below.

Equitable Life Payment Scheme - important next steps (Opens new window)

In outline, the ELPS will work as follows:

  • Payments will be made to individuals who have suffered relative loss as a result of Government maladministration in the regulation of Equitable Life.
  • Relative loss is the difference between the actual returns received, or expected to be received, from Equitable Life and the assumed returns that the policyholder would have received, if they had invested the same amount in a similar product in a comparable company. Policyholders with With Profits Annuities (WPAs) will receive payments covering 100 per cent of their loss. Those with Accumulation With Profits (AWP), Conventional With Profits (CWP), or group scheme policies, will receive lump sum payments of 22.4 per cent of their loss, subject to a £10 de minimis on payments.
  • First payments will be made by the end of June 2011. Payments to traceable AWP, CWP group scheme policyholders should be made over the first three years of the scheme. WPAs will receive their payments on an ongoing annual basis.

Tax and tax credit effects

SI 2011/1502 provides that authorised payments under ELPS are disregarded for the purposes of:

  • Income Tax
  • calculating investment income for tax credits
  • Capital Gains Tax
  • Corporation Tax

The SI also ensures that Inheritance Tax is not chargeable on the value of any right to receive an ELPS payment.

All direct payments from the scheme to payees as identified in the scheme documentation are authorised payments.

Payments from trusts to beneficiaries of trust will retain their tax free status where the beneficiary is entitled as of right to receive the payment under the terms of the trust.

Payments made by trustees in exercise of a power or discretion given to them by the trust deed are not authorised payments as they do not flow directly from the receipt of the payment. They will therefore be subject to the usual tax treatment for such payments.

The main practical effects of the exemptions under the SI are as follows.

Income Tax and Corporation Tax on income

Payments under ELPS to individuals and companies are free of Income Tax and should be excluded from Self Assessment tax returns or claims for repayment of tax on form R40.

The position for trustees of pension schemes is set out below. In other cases, if the trust is a bare trust or interest in possession trust it is the beneficiary of the trust who is potentially liable to tax on the trust income. The position is therefore as in the previous paragraph: payments are free of Income Tax and should be excluded from tax returns or claims for repayment of tax. Trustees of accumulation or discretionary trusts are also exempt from Income Tax on payments made to them under ELPS and should exclude the payments from the Trust and Estate tax return.

Payments involving Registered Pension Schemes

‘Authorised payment’ and ‘trustee’ in this context mean a payment as authorised by the ELPS and the recipient of that payment under the Equitable Life (Payments) Act 2010. An authorised payment under this Act is not the same as an authorised payment under the Registered Pension Schemes tax legislation in Finance Act 2004.

Direct payments to individuals

In a registered pension scheme case the authorised payment will generally be made to the member to whom the policy relates. All payments to individual payees will be free of tax. However, in certain circumstances, the payee will not be the individual member of the scheme. In these cases the principles for identifying the payee are shown below.

Payments in group pension schemes

Payments will be made to group pension schemes in three ways:

  • Where the ELPS has contact details for individual members, the majority of payments will be made directly to each member.
  • In some cases payments will be made to the trustee and they will be asked to distribute payments amongst their members. (For example, this will happen when the pension scheme has a single policy, which represents the investment of a number of members, for whom Equitable Life will not have contact details.) The trustee will receive the payment from the ELPS as their paying agent and will then pass the payment on to members. These payments will not be held as part of the pension scheme and will not be treated as payments from the pension scheme.
  • Where the policy has been held by a defined benefits scheme (for example, a final salary scheme), payments will be made directly to the trustee as it is the scheme that has suffered the loss.

In all these cases, payments will remain free of tax to the final recipient, whether that is an individual scheme member, or the pension scheme trustee.

Returns and reporting

In all pension cases the payments should be excluded from tax returns. The payments should not be included in any returns or reports made by a registered pension scheme administrator, for example event report, Pension Scheme Return.

Non-pension life insurance policies/annuity contracts

Payments under ELPS are disregarded for the purpose of Income Tax when calculating gains under the chargeable event gain regime. The payments will not be included in chargeable event certificates issued to policyholders by Equitable Life when gains arise. They do not have to be included in the parts of tax returns dealing with life insurance gains for persons liable to Income Tax on the gains, whether individuals, trustees or personal representatives.

Payments under ELPS are also disregarded for the purpose of Corporation Tax in the application of the loan relationships rules to investment life assurance contracts to which a company is a party.

Tax credits

Authorised payments are disregarded as investment income for the purposes of the child and working tax credits and will not affect eligibility for such support. Consequently, authorised payments will not have to be reported by tax credit claimants as part of their annual income.

Capital Gains Tax and Corporation Tax on chargeable gains

Payments under ELPS to Equitable Life policy holders are disregarded for the purposes of Capital Gains Tax and Corporation Tax on chargeable gains. This treatment applies whether the payment is received by an individual, trustee, personal representative or company. The payments do not have to be shown on the capital gains pages of the recipient’s tax return or otherwise reported to HMRC. They do not represent a disposal or part disposal of the policy for tax purposes, so any allowable cost of the policy is unaffected going forward.

Inheritance Tax

Where a payment is made to the estate of someone who has already died, the right to receive the payment is disregarded in establishing the value of the estate for Inheritance Tax purposes. There is no need to tell HMRC Trusts and Estates that the executors have received such a payment. A payment that is made to someone whilst they are alive, however, forms part of their estate and will be subject to Inheritance Tax in the normal way.

A similar treatment applies where the trustees of a 'relevant property' trust receive a payment. 'Relevant property' has the meaning given by section 58 of the Inheritance Tax Act 1984. The right to receive the payment should be disregarded in determining the value of relevant property that is subject to a 10 year charge. Again, there is no need to tell HMRC Trusts and Estates that the trustees have received such a payment after a 10 year charge has fallen due. Once the trustees have received the payment, however, it forms part of the assets of the trust and will be subject to Inheritance Tax in the normal way.

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© Crown Copyright 2011.

A licence is needed to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs.

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Article Published/Sorted/Amended on Scopulus 2011-07-28 16:18:55 in Tax Articles

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