Regulations for the taxing of personal portfolio bonds in the UK came into force on 2 April 1999 with...
The issue of when an insurance bond becomes classified as a personal portfolio bond is a long and somewhat convoluted story.
The story starts in early 1990, when the Inland Revenue contacted various life companies as part of a review they were then undertaking of sections 739-746 of the Income and Corporations Taxes Act (1988) - the anti-avoidance provisions.
If an individual had transferred their assets abroad to a non-UK resident and income subsequently became attributable to that non-UK resident, the Revenue proposed that if that person was ordinarily resident in the UK and had the power to enjoy that income, then they should be treated as if they were UK residents and taxed accordingly.
In real terms, this meant that a single premium insurance bond whose performance and benefits were linked to an individual fund made up of assets chosen by the policyholder or their adviser and issued by a non-resident insurance company would be taxed as described.
Most of the insurance companies were resident in the Isle of Man and combined to voice their concerns to the Revenue through the Association of International Life Offices (AILO).
Regular meetings took place between the Revenue and AILO which argued vigorously that these policies had been sold since 1978 and, as anti-avoidance provisions had existed since 1936, they could not understand the cause of this apparent change. However, it soon became clear that the Revenue could not be persuaded from their position.
Policyholders resident in the UK started to pay their 'new' and additional tax liability on their highly personalised bonds, using information provided by the life company. However, one individual took exception to these circumstances.
Professor Willoughby started his own discussions with the Revenue which were followed with keen interest by the offshore life offices.
Discussions were followed by legal actions, the arguments from both sides being reported at length.
Finally, Lords Nolan, Mustill, Hoffman, Clyde and Hutton gave their opinions in the House of Lords on 10 July 1997 and supported the decision of the Court of Appeal that found in favour of Professor Willoughby.
They provided confirmation that there was no tax liability arising on the income of the bonds and that these were insurance bonds to be taxed under the Chargeable Event legislation as other life insurance products. No distinction should be drawn.
This then threw into question the working definitions that had arisen between the highly personalised bond and the pooled fund bond.
Part of the Willoughby defence was closed by the introduction of section 81 of the Finance Act (1997), but the highly personalised bond was still seen as a potential income drain by the Revenue.
Within the Finance Act (1998), section 553C was added to the Taxes Act (1988), enabling the Revenue to impose new regulations for the taxing of highly personalised bonds that are now called personal portfolio bonds (PPB). Draft regulations appeared and were discussed exhaustively with AILO. The outcome was the Personal Portfolio Bonds (Tax) Regulations (1999).
For the first time the regulations provide a definition of a PPB. It is a policy of life insurance under whose terms: "(a) some or all of the benefits are determined by reference to the value of or the income from, property of any description... or fluctuations in, or in an index of, the value of property of any description... and (b) some or all of the property... may be selected by, or by a person acting on behalf of, the holder of the policy...".
The definition then carries descriptions of assets that are allowable or inoffensive and would prevent the bond being described as a PPB.
More importantly for those who know they already have a PPB, there is a section in the regulations entitled 'Policies or contracts issued or made before 17 March 1998 which are the subject of special exclusions from being personal portfolio bonds'. It is this section that life companies are monitoring their PPBs against. They are currently writing to their policyholders with their conclusions.
Those lucky enough to be excluded can continue with their bond, provided they stay within their investment restrictions. However, these restrictions still allow investments into shares or securities listed on a recognised stock exchange, certain assets on the Unlisted Securities Market or the Alternative Investment Market along with a wide range of pooled funds.
Those policyholders that are subject to the special exclusion must make sure they do not inadvertently negate their position by investing in offensive assets. Those who are currently residing outside the UK will have 12 months, should they come to live in the UK, to have their policy reviewed to see if they can benefit from the special exclusions. Finally, those UK-resident PPB policy holders must be prepared for the new tax charge.
A PPB will be deemed to have grown by 15%pa. The actual growth calculation will apply from the commencement of the bond.
A new chapter in the story is now beginning, with life companies scrutinising both the regulations and the guidance notes that have now been issued by the Revenue to see how products may be developed for the future. But it is important to remember that in those very guidance notes it says: "The Government brought in the personal portfolio bond legislation as a part of the drive towards fairness in the tax system".
Perhaps the final chapter has yet to be written and this is indeed a never-ending story.
Susan Quayle is marketing manager at
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