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UK taxation of offshore bonds, part 3

This article explains how personal portfolio bond taxation interacts with other UK chargeable events.

What is a Personal Portfolio Bond (PPB)?

Under UK legislation laid down by UK Parliament, life assurance and capital redemption bonds which give investors the freedom to invest in a wide range of assets beyond those described within the legislation are called personal portfolio bonds.

What is a PPB deemed gain?

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 following examples.

The legislation is contained in the Income Tax, Trading and other Income Act (ITTOIA) 2005 (Sections 515 to 526).

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 - previous excess gains) x15% = Yearly deemed gain

Example

Premium £100,000. Policy commenced 20 July 2010. PPB deemed gain arises 19 July each year that the policyholder is UK resident.

Policy year ending

Premium

+

Previous Cumulative deemed gains

-

Previous excess gains

x 15%

=

Yearly deemed gains

Cumulative deemed gains

19 July 2011

(£100,000

+

Nil

-

Nil)

x 15%

=

£15,000

£15,000

19 July 2012

(£100,000

+

£15,000

-

Nil)

x 15%

=

£17,250

£32,250

19 July 2013

(£100,000

+

£32,250

-

Nil)

x 15%

=

£19,838

£52,088

19 July 2014

(£100,000

+

£52,088

-

Nil)

x 15%

=

£22,813

£74,901

19 July 2015

(£100,000

+

£74,901

-

Nil)

x 15%

=

£26,235

£101,136

 

There is also interaction with UK chargeable events and the PPB deemed gain in two ways:

1. Excess gains when calculating the yearly PPB deemed gain.

Example

Assuming that a part surrender of £22,250 was taken in the policy year ending 19 July 2014, this would exceed the 5% tax deferred allowances and produce an excess gain of £2,250. The revised calculation of the PPB deemed gain for the fifth policy year would be:


Policy year ending

Premium

+

Previous Cumulative deemed gains

-

Previous excess gains

x 15%

=

Yearly deemed gains

Cumulative deemed gains

19 July 2015

(£100,000

+

£74,901

-

£2,250)

x 15%

=

£25,898

£100,799

 

 

 

 

 

 

 

 

 

 


2. PPB cumulative deemed gains (due in previous tax years) for full surrender, maturity, death or full assignment chargeable events calculations.

Example

Assuming that the same policy from the example above is fully surrendered on 30 June 2016 for £200,000, the calculation of the chargeable event for full surrender (final event) would be:

 

(Surrender value

+

Previous part surrenders & part assignments for consideration)

-

(Premiums

+

Previous excess gains

+

Cumulative deemed gains)

=

Chargeable gain

(£200,000

+

£22,250)

-

(£100,000

+

£2,250

+

£100,799)

=

£19,201


Please note that 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.

Is it possible to change a PPB so that the PPB deemed gain will not apply?

Yes. It is possible to endorse your bond to restrict the assets to those within the PPB legislation (Section 520 of ITTOIA 2005) which can be held without the policy being considered a PPB.

Does the deemed gain calculation apply to gains made in the final policy year?

No. 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.

http://www.hmrc.gov.uk/manuals/iptm/IPTM3650.htm 
http://www.hmrc.gov.uk/manuals/iptm/IPTM3600.htm 
http://www.hmrc.gov.uk/manuals/iptm/IPTM3505.htm 
http://www.hmrc.gov.uk/manuals/iptm/IPTM3660.htm

What restrictions are imposed on using reliefs with PPB deemed gains?

Top slicing relief and deficiency relief are not available. However, time apportionment relief is available where a policyholder has only been UK resident for part of the ownership of a bond when tax becomes payable for a PPB deemed gain.

This is calculated simply as:


Gross yearly deemed gain

X

Number of days resident in the UK

= Net Yearly deemed gain

 

 

_____________________________

 

 

 

Number of days bond has been in force

 

Non-UK investors returning to the UK

Provided that the policyholder endorses their bond to restrict the assets in their policy to those permitted within the PPB legislation (Section 520 of ITTOIA 2005) before the end of the policy year in which the policyholder becomes UK resident, then no UK income tax for the PPB deemed gain will be payable.

Tax is only one factor to be considered before making surrenders. For example, there may be high exit charges on full surrender of the policy, or the current performance of the markets in which the policyholder is invested makes realising assets less favourable.

The information provided in this article is not intended to offer advice.

It is based on Old Mutual Wealth's interpretation of the relevant law and is correct at the date shown at the top of this article. While we believe this interpretation to be correct, we cannot guarantee it. Old Mutual Wealth cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

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