Investment Bonds have formed part of many investment strategies and the tax wrapper purchased by many – care is needed. In recent years there has been an explosion in the number of off-shore bonds and based on assets owned or the contract terms these may be defined as a Personalised Portfolio Bond (PPB), which is taxed differently.
Beware – for a UK resident – taxed in the UK individuals the tax is payable each year based on yearly deemed gain and the cumulative gains – so not just the yearly actual gains – assessed and taxed at your personal rate of income tax.
Personal Portfolio Bond Legislation
The PPB legislation is an anti-avoidance measure which imposes a yearly deemed gain on life assurance and capital redemption policies where the property that determines the benefits is able to be selected by the policyholder.
The deemed gain is subject to income tax where the policyholder is UK tax resident. The legislation can be found in Income Tax, Trading and other Income Act (ITTOIA) 2005 Sections 515 to 526. The PPB legislation applies for policy years ending on or after 6 April 2000 and the tax year 2000-2001 is the first for which a PPB gain can arise.
Personal Portfolio Bond Tax Charge
Where a policy is regarded as a PPB then the PPB legislation imposes a tax charge on an artificial deemed gain on the policy for policyholders who are UK resident individuals, UK resident settlors or UK resident trustees (where the settlor is not UK resident or has died).
The tax charge based on the PPB deemed gain is payable yearly for UK resident policyholders. The PPB deemed gain is calculated at the end of each policy year while the policy is in force. It does not apply on surrender, death or maturity, but previous amounts are taken into consideration as shown in the example below.
How is it Calculated and Applied?
The PPB deemed gain is not based on actual gains. The PPB deemed gain assumes a gain of 15% of the premium and the cumulative gains for each year the policy has been in force. The tax charge on the PPB deemed gain will be the highest rate of tax paid by the investor. Top slicing relief is not available.
What Policy Assets Are Permitted Under the Personal Portfolio Bond Rules?
- property appropriated by the insurer to an internal linked fund
- units in an authorised unit trust
- shares in an approved investment trust
- shares in an open-ended investment company
- cash*
- life policy, life annuity or capital redemption policy, unless excluded (see below1)
- an interest in non-UK collective investment schemes (not closed-ended funds)
- Cash includes sums in bank or building society accounts, but not cash that is acquired in order to realise a gain on its disposal.
A life policy, life annuity or capital redemption policy is ‘excluded’ if:
- the policy or contract is itself a personal portfolio bond; or
- the value of any benefits under the policy or contract is determinable
directly or indirectly by reference to a personal portfolio bond;
or
- a personal portfolio bond is property related to the policy or contract.
Some examples of policy assets which are not permitted under the PPB rules :-
- Any stocks and shares not listed on a recognised stock exchange,
- Loan Notes linked to the value of an index or a security which are not themselves collective investment schemes,
- Private company shares,
- Non UK closed ended funds,
- Cash held with the intention of currency speculation.
Returning to the UK with a Personal Portfolio Bond
The test of whether a policy is a PPB is an ongoing test. If a policy was originally a PPB but its terms were varied so that it ceased to be a PPB then the PPB tax charge will not arise.
The yearly PPB deemed gain only arises if a policy or contract is a PPB on the last day of the related policy year.
The following options are available:
- Do nothing. In which case the tax charge for a PPB deemed gain will apply.
- Request the product provider to endorse the policy and therefore restricting the assets to permissible assets only.
Will there be any changes to the assets that are allowed?
Since the PPB rules have been in force, the only changes to the investments have been an extension to the list of assets which are not permitted assets. Once the policy is endorsed, should any assets at a future date cease to be permitted they will have to be disposed of at the first reasonable opportunity.
Cash Holdings – must not be for the purpose of currency speculation. Any cash held in the policy which arises as a result of buying and selling investments (essentially a transaction account), and which is in the currency of the policy is permitted. In addition a bank or building society deposit account in the currency of the policy is permitted as well as a number of others.
Closed Ended Funds
With closed-ended funds, only shares in UK FSA authorised investment trusts are permitted. The Financial Services and Markets Act 2000 states that closed-ended vehicles are not collective investment schemes. Therefore non-UK closed-ended funds cannot fall within the permitted assets. Shares in a non-UK company may not be classed as an OEIC under the Financial Services and Markets Act 2000 and therefore may not be permitted assets. Clarification should be sought on each asset.
It is essential that policyholders inform their fund adviser of their decision regarding endorsing their policy, and restricting what assets they can invest in. It is the policyholders responsibility, along with the fund adviser to monitor your investment selection. The product provider/insurance company are not responsible for this, nor are they obliged to pass on to the policyholder or fund adviser information relating to your selected funds.
What happens if a fund adviser accidentally acquires non permitted assets for a client’s policy?
This is a risk, which is why it is important that a fund adviser knows about the restrictions. It would clearly be an action which would breach the terms of the endorsed policy and that breach must be remedied. It is probable that it would be necessary to discuss the matter in full with HM Revenue & Customs.
Points to consider if assets need to be sold
If assets have to be disposed of to allow a policy to be endorsed, policyholders need to consider the cost of the PPB tax charge against the current market value of the assets and possible future growth.
Consideration also needs to be given to assets with restricted dealing days, ensuring there is sufficient time for receipt of the endorsement request and time to sell the assets and endorse the policy before expiry of
the time limit.
What happens if a policy is not endorsed before the time limit expires?
The tax charge for the PPB deemed gain will apply. The charge is assessed on the day before the policy anniversary each year. The charge will cease to apply for the policy year ending after the policy has been endorsed.
Action checklist
- The policyholder should discuss their options with their financial adviser or fund adviser.
- Decide whether or not to endorse the policies to avoid the tax charge or continue with it unchanged.
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