Our client is an EU-based insurance company which would like to market one of its insurance products in the UK. Under the terms of the policy, the policyholder has the right to select investments in some circumstances and from certain categories of investments. We would like to know whether such a policy can be sold in the UK without triggering an adverse charge to income tax under the rules for personal portfolio bonds.
The taxation of gains on insurance policies is dealt with under ITTOIA 2005 Chapter 9. Gains are usually only charged to income tax on the happening of a chargeable event, such as the surrender or sale of the policy. This means that insurance policies can be an attractive investment product, as income and gains can be accumulated and the tax liability would be postponed until a chargeable event arises. There are, however, special rules for policies which fall to be treated as personal portfolio bonds (PPBs); and gains arising in respect of such policies are chargeable to income tax annually. The purpose of these rules is to prevent individuals from creating a personal portfolio of investments within an insurance company wrapper, in order to defer a liability to tax.
The PPB legislation only applies to policies under whose terms:
A policyholder’s ability to select has a very wide meaning and can extend to circumstances where a policyholder, indirectly, has a say in the selection or has some influence over the selection. If the policyholder has an option to select property, the policyholder will be treated as having the ability to select, even if the option is not exercised.
The categories of permitted property are listed in s 520 and permitted indices are set out in s 518. Permitted property includes internal linked funds, collective investment schemes, approved investment trusts and cash. In the case of an internal linked fund, it is not necessary for the underlying property in the internal linked fund to fall within any of the other categories of permitted property, so that, for example, shares in a FTSE company could be selected. The key point is that the insurer has to have appropriated the property to an internal linked fund and the policyholder can only select from property which has already been appropriated. Cash can be selected, as long as it cannot be used under the terms of the policy for speculative purposes. Cash does not include ‘cash-like’ assets, such as bullion, or any types of related security, like permanent interest bearing shares issued by a building society. Loan notes are also excluded.
The permitted indices are the UK retail price index (and foreign equivalents) or published indices of prices of shares listed on a recognised stock exchange. For an index to be ‘published’, its daily closing value must appear either in newspapers or through a freely available electronic news service. The term ‘shares’ includes stock but does not include securities, so that an index of corporate bonds or UK gilts would not qualify. There is a distinction between benefits under a policy determined directly by reference to a specified index and benefits determined by the value of property that is linked to an index. Accordingly, if benefits depend on the value of units in an authorised unit trust, where its value tracks an index, the policy would not be a PPB, even if that index is not within the category of permitted indices.
There are also selection rules that have to be satisfied, even if the terms of the policy restrict selection only of the categories of permitted property and indices. The policyholder may only select property or an index that is available for selection by policyholders at large, though the rules permit selection by a class of policyholders as opposed to selection by all of the policyholders. The insurance company alone can determine the ‘class’ and one person cannot constitute a ‘class’. The other conditions are that the opportunity to select the property or index must be clearly identified in marketing or other promotional material, which has to be made available to potential policyholders at large. The promotional material should also make it clear that the property or index is available for selection by all policyholders in the class for the whole of the period for which it is available. The insurer cannot limit the opportunity solely to persons who are connected with each other.
The ability to select property does not have to be available continuously, provided that it applies to a class of policyholders at the time that it is available for selection. Where property can be selected and that particular property ceases to be available, for example, as a result of a marketing campaign coming to an end, the policy would not become a PPB as a consequence. Limitations on investment are also permitted, as long as the limitations are objective and are not based on personal or individual criteria and provided that the policyholder has not had a hand in setting the limitations.
Where does this leave us?
It would be possible for your client to market a policy that involved the selection of property, as long as the selection and the categories of property satisfy the rules described above. In particular, HMRC will not look at the underlying investments owned by the insurance company, but at the rights in the policy as regards the ability to select.
It is fundamental that selection is open to a ‘class’ of policyholders and that your client determines the composition of the class. It is also crucial that the right to select is clearly identified in all marketing material. Your client should not offer any policy for sale in the UK unless its promotional literature satisfies this condition, as HMRC would treat the policy as a PPB, even if all of the other conditions would be met.
