In simple terms, a Personal Portfolio Bond (PPB) is a life assurance or capital redemption policy which gives investors the freedom to invest in a wide range of assets beyond those described within the legislation.
In law, it is the life assurance company not the policyholder that owns the property which in turn determines the benefits payable under the life assurance or capital redemption policy. The legislation provides that as the policyholder essentially has the ability to select the property which determines the policy benefits, the policyholder retains nearly all the advantages of direct personal ownership of the policy. However, as the property is held in the “wrapper” of a life assurance or capital redemption policy, the policyholder does not have to pay income tax on dividend and interest income arising from the investments nor capital gains tax on disposals when the investments underlying the policy are altered.
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.
PPB 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.
The formula is:
(Premium + cumulative deemed gains MINUS previous excess gains) x15% = Yearly deemed gain
Premium £100,000. PPB commenced 20 July 2006. PPB deemed gain arises 19 July each year that the policyholder is UK resident.
|Policy year ending
||Previous Cumulative deemed gains
||Previous excess gains
||Yearly deemed gains
||Cumulative deemed gains
Gains made in the final policy year
The deemed gain calculation can be ignored in the final policy year - but only as it relates to that policy year.
So for example, an accrued deemed gain of £100,000 which resulted from holding the PPB for 5 years outside the UK, would still need to be included in the final surrender calculation.
However, the deemed gain that was incurred in the same year as the year in which the policy is fully surrendered can be ignored (This includes the policy year which has been extended because the policy year begins and ends in the same tax year). Further information on this is contained in the HMRC links below.
21 March 2012 changes
Policies issued on or after 21 March 2012, will no longer be able to include excess events including PPB deemed gains in the full surrender calculation, where those excess events or PPB deemed gains have not been charged to UK income tax (for example, the policyholder was not UK resident at the time the excess events occurred).
Insurers will still calculate the gain as shown above, but when the policyholder comes to complete their self assessment form, they will need to increase the gain by any excess gains (including deemed gains) made while they were non-UK resident.
These changes will apply to all final event calculations (maturity of the policy, death of the last life assured or full assignment for consideration of money's worth as well as full surrenders).
This change will only affect policies which started before 21 March 2012, if after 20 March 2012, the policy:
- is assigned in whole or part, or
- used as security for a debt, or
- has further premiums paid to the policy.
What policy assets are permitted under the PPB 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
- life policy, life annuity or capital redemption policy, unless excluded**
- 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 PPB
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.
Therefore, for policyholders who are returning to the UK and will become UK tax resident or have just returned to the UK with either of the following policies:
- Old Mutual International Executive Investment Bond (EIB)
- Old Mutual International Executive Redemption Bond (ERB)
- Old Mutual International Ireland European Executive Investment Bond (EEIB)
The following options are available:
- Do nothing. In which case the tax charge for a PPB deemed gain will apply.
- Request either Old Mutual International or Old Mutual International Ireland, as appropriate, to endorse the policy and therefore restricting the assets to permissable assets.
Things to consider where the option to endorse has been requested
Policies issued before 17 March 1998 (no further premium paid after 15 July 1998):
Where the policy or contract was made before 17 March 1998, and no further premium has been paid on or after 16 July 1998, the terms of the policy may permit the selection by the policyholder of the following property and indices to determine the benefits without it being a PPB:
- all property and indices permitted under the normal rules,
- shares or securities that are listed on a recognised stock exchange, and
- shares or securities of a company dealt on the Unlisted Securities Market or Alternative Investment Market, subject to the limitations on maximum percentages of holdings.
This is subject to either of the following conditions being satisfied:
- it has at no time since 6 April 1994 been possible under the terms of the policy or contract to select property or an index other than from the permitted categories listed above, or
- if it has been possible since 6 April 1994 to select property or an index other than from a permitted category then:
- no such forbidden property or index has actually been selected, and
- the terms of the policy have been varied within the transitional period to restrict selection of property and indices to the permitted categories.
Policies issued before 17 March 1998 (further premium paid after 15 July 1998) or Policies issued after 17 March 1998:
The policy can be endorsed to permitted assets only. Any assets which are not permitted will need to be disposed of and reinvested in permitted assets before the endorsement can be applied.
Policyholders will also need to consider whether the time is right to sell any assets not permitted. They will need to weigh up the cost of a tax charge on the deemed gain against the potential for increase in the value of assets, were the sale deferred.
Old Mutual International or Old Mutual International Ireland is not in a position to provide any form of advice in such matters. Some assets have restricted dealing days which may also cause delays to disposal and therefore application of the endorsement.
Points to consider
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 as detailed above.
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 and 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.
Seek Advice – Warn fund advisers and stockbrokers
It is essential that policyholders inform their fund adviser or stockbroker 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 or stockbroker to monitor your investment selection. Old Mutual International or Old Mutual International Ireland are not responsible for this, nor are they obliged to pass on to the policyholder or fund adviser or stockbroker information relating to your selected funds. However, Old Mutual International will endeavour to ensure advisers only deal in acceptable assets but cannot guarantee this.
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 by Old Mutual International or Old Mutual International Ireland 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.
So, if the policyholder, whose policy commenced on 6 March 2005, became UK resident in June 2010, they did not endorse their policy and therefore a tax charge for the PPB deemed gain would apply for the 6 March 2010- 5 March 2011 policy year.
The policyholder then request to endorse the policy and this applies from 1 May 2011. Therefore, no further PPB charge will apply on the 6 March 2011-5 March 2012 policy year. As on the day the PPB deemed gain test next applies (in this example is 5 March 2012) the PPB has been endorsed so it can only hold permitted assets.
The policyholder should discuss their options with their financial adviser, fund adviser or stockbroker.
Decide whether or not to endorse the policies to avoid the tax charge or continue with it unchanged.
If your client holds a Old Mutual International EIB or ERB or Old Mutual International Ireland EEIB and assets need to be sold to endorse the policy, complete a dealing instruction form.