At the 2016 Budget it was announced that the government would
review the categories of permitted investments which could be held
in a policy of life insurance, life annuity or capital redemption
policy without it becoming taxable as a personal portfolio bond
HMRC has now launched a consultation which invites views on the
current property categories and further property types which may be
held within a PPB. The title of the consultation document,
published on 9 August, is the same as the title of this
Broadly, there are three types of investment vehicle which are
being considered to be included within the permitted category list.
- real estate investment trusts (both UK and foreign
- overseas equivalents of UK approved investment trusts; and
- UK authorised contractual schemes.
The government is keen to hear from interested parties,
especially policyholders and their representatives, members and
representatives of the life assurance and funds industries and life
policy administrators for whom these changes may have a material
The consultation closes on 3 October 2016 and draft legislation
is expected in advance of Finance Bill 2017.
The aim of this article is to examine the nature of PPBs to
serve as a refresher for some readers and provide a source of new
information for other readers.
By way of background, Finance Act 1998 introduced a penal annual
tax charge on PPBs issued by either a UK or non-UK resident life
company. Broadly, the tax charge is levied on a deemed
chargeable event gain. This is based on 15% of premiums paid
plus all previous amounts brought into charge to tax under the PPB
provisions - see example in section 4.
The PPB rules were introduced because taxable gains can only
arise under non-qualifying policies, the majority of which take the
form of single premium investment bonds, when cash is taken from
The ability to defer any tax charge until encashment encouraged
exploitation of the legislation - for example, individuals would
introduce shares in their own company into the life policy to defer
personal tax on income and/or capital gains derived from those
The definition of a PPB includes a life policy whose terms allow
the policyholder (or, essentially, those acting for the
policyholder) to select the property in which their premiums will
be invested. However, to narrow the scope of the rules,
regardless of who has the power to select the property underlying
the policy, investment is permitted into what are called "pooled
investments" - see section 3 below. A feature of these pooled
investments is that the funds are managed by professional managers
who make the decisions as to where the funds are ultimately
invested. In other words the investor has no control over the
THE DEFINITION OF A PPB
Section 516 ITTOIA defines a personal portfolio bond as a policy
of life insurance, contract for a life annuity or capital
redemption policy (in practice most PPBs will be single premium
investment bonds) that meets two conditions, AandB. These
conditions are examined below.
Condition A will apply when the investments, by reference to
which the benefits under the policy are calculated, are outside the
following types of investment:
- property in an internal linked fund of the insurer. It is
important to note that, depending on circumstances, an EEA insurer
may be subject to the Interim Prudential Sourcebook for Insurers
made by the Financial Services Authority which prescribes what type
of assets may be used to determine the value of benefits payable
under a unit-linked life assurance policy. This would
therefore have the effect of restricting the investment links of
- units in an authorised unit trust or shares in an approved
investment trust or shares in an open-ended investment company as
defined in section 236 Financial Services and Markets Act
- units or shares in overseas collective investment funds. The
precise wording of this section is:
"an interest in a collective investment scheme constituted
(i) a company which is resident outside theUnited Kingdom(other
than an open-ended investment company);
(ii) a unit trust scheme the trustees of which are non-UK
(iii) any other arrangement which takes effect by virtue of the
law of a territory outside the United Kingdom, and which under that
law creates rights in the nature of co-ownership (without
restricting that term to its legal meaning in any part of the
- cash, including cash in a bank or building society account
(except cash held for speculation)
- insurance policies that are not themselves personal portfolio
All of these investments (which are generally referred to as
"pooled assets" or "pooled investments") are also subject to the
conditions in sections 519 (for indexed funds) and 521 (for other
funds) of the Income Tax (Trading and Other Income) Act 2005 or
ITTOIA 2005 that the insurer makes the investments generally
available to all other, or to all of a class of,
policyholders. Subject to these conditions, of which there
are three and which are described below, a class of policyholders
means a number of policyholders to whom the opportunity is given to
select the property. One person cannot constitute a
Section 519(4) or section 521(4), as appropriate, provide that
the insurance company can satisfy the "available to a class" rules
by, in effect, satisfying the three conditions in section
The three conditions to be satisfied for a number of
policyholders to represent a "class" are as follows:-
- The opportunity to select the property or index is clearly
identified in marketing or other promotional literature that the
insurer has published. The marketing material must have made
the opportunity available to potential policyholders at large.
- The insurer does not limit the opportunity solely to persons
who are connected with each other. The meaning of "connected"
is defined in sections 827 and 993-995 Income Tax Act 2007.
It is not necessary for two or more unconnected policyholders to
select a particular property so long as the class of policyholder
to whom the insurer makes available the opportunity does not
consist solely of a group of connected policyholders.
- The insurer alone determines the composition of the class.
As far as sections 519(4) and 521(4) are concerned, the wide
menu of investments that insurers can and do offer could mean that
there could be one policyholder of a policy issued by a particular
insurer who selects a particular property to determine the benefits
under that policy. The test laid down is the extent to which
the ability to select particular property is available to potential
policyholders of that insurer not the number of policyholders who
make the selection. In theory, therefore, there might only be
one policyholder investing in one fund and this may be permissible
provided the investment fund is generally and genuinely available
to all policyholders.
In addition to satisfying condition A then, under Condition B,
for the PPB tax charge to apply the policyholder, or a person
acting on behalf of the policyholder, must,under the terms of the
policy, be able to select the property. This aspect concerns
the policyholder's control over the investment fund - section 516
(4) of ITTOIA 2005.
For these purposes, a policyholder will be treated as having the
"ability to select" if, under the terms of the policy, the property
which determines the policy benefits may be selected by any of the
- the policyholder;
- a person acting on behalf of the policyholder;
- a person connected with the policyholder;
- a person acting on behalf of a person connected with the
- the policyholder and a person connected with the
- a person acting on behalf of both the policyholder and a person
connected with the policyholder.
Where a policyholder is unable to select, within the extended
meaning set out above, property that determines the policy
benefits, the policy is not a PPB. This is the case even if
the property that determines the policy benefits does not comprise
of the "permitted investments" allowed in sections 518 (the index
categories) and 520 (the property categories) of ITTOIA 2005.
Basically, what matters is whether, under the terms of the
policy, the policyholder has or does not have the ability to select
the property held in the policy. For this purpose the ability
to select is interpreted widely. Therefore if a person other
than the policyholder (or somebody within the meaning of
policyholder above) had the ability to select the property - even
if that property was not a permitted investment - the policy will
not be a PPB. However, HMRC has stated that this
interpretation may be tested if personal assets are held within the
PPB and by this it is thought it means highly personalised assets
e.g. shares in a family company, fine wines, vintage cars,
paintings and racehorses.
THE CALCULATION OF THE TAX
The tax charge did not apply until the first policy year
endingafter5 April 2000 and taxable amounts are treated as arising
at the end of the policy year (before other charges arising at the
end of the policy year).
Where the tax charge does apply it takes effect under the
chargeable event legislation. The following points are
relevant in this connection:
- The taxable amount is 15% of an aggregate amount equal to the
premium(s) paid to the policy plus the aggregate of all the
previous taxable amounts arising under the PPB provisions.
- This annual charge only arises during the currency of a policy
and not when it comes to an end.
- A deduction is allowed for taxable amounts withdrawn from a
policy, i.e. withdrawals in excess of the 5% allowances, from
inception to the end of the policy year immediately preceding the
current policy year.
- The deemed gain is treated as arising before any other
gain. This means that the deemed gain for a policy year will
be calculated before the gain on a part surrender chargeable event
occurring in the same policy year.
- Taxable amounts are assessed to tax in the same way as other
chargeable event gains butno top-slicing reliefis available in
respect of the charge.
- The total amount treated as a notional gain under the
provisions is allowed as a deduction from any other chargeable
event gain arising on death, maturity, surrender or assignment of
the policy for consideration in money or money's worth. If a
deficiency (i.e. a final loss) arises relief can be given against
the individual's other total income on the usual basis.
Example of tax calculation
The following is an illustration of how the tax charge could
Assume that an investment of £50,000 is made in a non-UK bond
the underlying terms and investments of which have made it subject
to the PPB annual charge.
The legislation provides that amounts are treated as gains for
each policy year ending after 5 April 2000. Such deemed gains are
treated as arising at the end of each policy year before any other
tax charges arising at the end of the policy year in question e.g.
gains arising in respect of an actual part surrender.
The first charge arises on the final day of the first policy
year. For a policy which commenced on 1 July 2015, for
example, the first gain, assuming that the policy is a PPB, would
have arisen on 30 June 2016, in the year of assessment
Under section 522 of ITTOIA 2005 a deemed gain arises when the
sum of PP and TPE exceeds TSG where:
PP = the amount of the premium paid in respect of the PPB
TPE = the cumulative total of past deemed gains under these
TSG = any excess over the cumulative total of 5% allowances in
respect of any withdrawal taken during the immediately preceding
policy year and treated as arising at the end of that policy year
and any such excesses that had occurred in policy years prior to
The deemed gain is 15% of the excess.
On the assumption that no withdrawals had been taken under the
bond the following would be the position in years one to four for a
UK resident higher rate taxpayer where the higher rate of tax
remains at 40%.
15 x (£50,000)[PP]/100 therefore gain = £7,500
Tax = £3,000
Note: As this is year 1 there has been no previous past "deemed
gains" so there is no "TPE" and there have been no withdrawals and
so there is no "TSG".
15 x (£50,000 [PP] + £7,500 [TPE]) / 100 therefore gain =
Tax = £3,450
Note: TPE is the year 1 deemed gain. There have been no
withdrawals so there is no "TSG"
15 x (£50,000 [PP] + £16,125[TPE]) / 100 therefore gain =
Tax = £3,968
Note: TPE is the cumulative total of deemed gains for years 1
& 2. There have been no withdrawals so there is no "TSG".
15 x (£50,000 [PP] + £26,044 [TPE]) /100 therefore gain =
Tax = £4,562
Note: TPE is the cumulative total of deemed gains for years 1, 2
& 3. There have been no withdrawals so there is no "TSG".
As can be seen, regardless of actual growth in the bond, there
is an increasing gain and tax liability.
If the bond is encashed at the end of year 4 and, based on
growth of 7% per annum (on the original £50,000) after all charges
it is worth £65,540, the final gain calculation would take account
of past annual amounts brought into charge to tax and would be as
Value of bond on encashment
Less original single premium
Less total annual gains under section 523
Such a deficiency/loss can provide relief for higher rate tax
purposes. However, in this example, though, deficiency/loss
relief would not be available as there have been no previous
chargeable event gains on part surrenders or part assignments by
way of sale under the same policy.
In conclusion, the investor has made a gain of £15,540 but paid
tax of £14,980 (40% on deemed gains of £37,451). Also, this
takes no account of the adverse cash flow involved in making
regular annual tax payments.
The possibility of increasing the scope of the investments
available to a life fund underlying a single premium investment is
to be welcomed. In stating this care will still need to be
exercised to ensure that a policy is not classified as PPB to
prevent an annual tax charge applying.