Monarch Assurance plc v Commissioners of Inland Revenue

A policy cannot qualify as a short-term life policy where it carries benefits into a later policy after the initial term. A right to transfer reversionary bonuses or equivalent benefits into a subsequent policy is an “other benefit” outside the permission in Schedule 15, paragraph 1(7) of the Income and Corporation Taxes Act 1988. The policy therefore fails the statutory conditions for a qualifying policy.

The Revenue’s certification function under Schedule 15, paragraph 21 is not an unqualified mandatory duty in relation to draft policies. The precise extent of the discretion was left open, but it may arise where the insurer is unauthorised or the draft is too obscure to permit its fiscal effect to be determined.

Monarch Assurance plc submitted a draft increasing term life policy to the Commissioners of Inland Revenue for certification as a qualifying policy under Schedule 15 to the Income and Corporation Taxes Act 1988. The policy required an initial payment, permitted later increases in the sum assured, and provided for reversionary bonuses attributable to the initial policy to be paid following a death during a subsequent policy.

Dyson J held that the policy satisfied the substantive statutory test, but that the Revenue had a discretionary power to refuse certification and had acted lawfully in doing so. Monarch appealed on the certification issue. The Revenue served a respondent’s notice challenging the decision on the substantive issue. The central questions were whether the policy secured prohibited additional benefits and whether certification was mandatory when the statutory conditions appeared to be met.

1. Appeal dismissed. The respondent’s notice succeeded on the specific issue. The order below was upheld, and Monarch was ordered to pay the costs, including the costs of the respondent’s notice.
2. The policy purported to be a term assurance for no more than ten years, but clauses 5 and 6 enabled the policyholder to carry benefits, including reversionary bonuses attributable to the initial policy, into a subsequent policy. A short-term policy is ordinarily worthless if the life assured survives the term. This arrangement therefore secured an additional benefit beyond the initial term.
3. Participation in profits under paragraph 1(7)(a) did not save the arrangement. That provision permits participation in profits as a feature of the policy itself. It does not permit profits attributable to an expired policy to be transferred into another contract. The arrangement accordingly contravened paragraph 1(1)(b), or alternatively could not properly be tested under paragraph 1(4) because it functioned as a longer-term policy and failed the conditions in paragraph 1(2) or (3).
4. The court also considered the general certification issue, although it was unnecessary to the result. Paragraph 21 did not impose an unqualified mandatory duty to certify every draft policy that appeared to satisfy Part I. Certification could be refused where, for example, the insurer was unauthorised or the draft was so obscure and incomplete that its legal and fiscal effect could not be determined.
5. The court left open the wider limits of the Revenue’s discretion, including whether a wider arrangement or possible tax-avoidance scheme could affect the true legal effect of a policy. Those questions were ultimately matters of statutory construction. Permission to appeal to the House of Lords was refused.

• Administrative Court: Dyson J held that the policy met the substantive qualifying-policy test, but that certification under Schedule 15, paragraph 21 was discretionary and the Revenue’s refusal was lawful: [2001] STC 92.
• Court of Appeal (Civil Division): The court allowed the Revenue’s respondent’s notice on the substantive issue, dismissed Monarch’s appeal, awarded costs to the Revenue, and refused permission to appeal to the House of Lords.