Not including any details that may appear in this year's UK Finance Act, there are several important ...
The Inland Revenue introduced new measures to tax personal portfolio bonds (PPB) in the 1998 Budget that were originally expected to take effect after April 1999. However, following lobbying from policyholders, advisers and product providers, the start date was deferred until April 2000. There was also a significant relaxation of the original measures allowing many policyholders that only held certain assets prescribed in the regulations to continue to take advantage of the more favourable original tax regime.
For a policy to be treated as a PPB, the policyholder, or someone acting on their behalf, must be able to choose the assets of the fund to which the bond is linked. In addition, it must be possible to select assets for the fund outside of a set list of permissible assets. By restricting the policy to assets within the allowable list, the bond is not classed as a PPB and the additional taxation is avoided. Assets that can be held within the bond include: Units in unit trusts, investment trusts, open-ended investment companies or similar pooled investment instruments. Cash accounts, including deposit accounts, building society accounts or internal insurance cash accounts, provided cash is not held for reasons of currency speculation. Internal funds offered generally by the life insurance company. Other insurance bonds that are not themselves PPBs.
Many investors have held PPBs for many years and the Government accepted the argument that these people should be protected from the new tax. As a result, the measures include transitional arrangements designed to protect most existing bondholders from the tax. Provided the bond was taken out prior to 17 March 1998 and new premium has not been invested since 16 July 1998, the bond will not be subject to the new tax unless it has held assets other than those set out above. In addition, stocks and shares listed on stock exchanges recognised by the Revenue are also permitted. These include most of the world's major exchanges, but excludes some minor ones such as Jakarta. Shares quoted on the Alternative Investment Market may only be held as a limited proportion of the total holdings of the bond.
To benefit from the transitional arrangement it is first necessary that only permitted assets have been held since 6 April 1994 and, secondly, it is necessary to change the policy conditions so that assets outside of this list cannot be held at any time in the future. This change must be made by 5 April 2000.
Policyholders with PPBs taken out before 17 March 1998 that are not currently UK-resident for tax purposes are not subject to any additional taxation. However, anyone who later moves to the UK and becomes subject to UK taxation should ensure that their policy conditions are amended to prevent holdings outside of the allowable list if they wish to benefit from the transitional arrangements and avoid the additional taxation. This change can be made at any time up to the end of a 12-month period starting on the anniversary of the policy commencement date which first falls after the date of return to the UK.
The level of the charge to tax if a PPB does not benefit from the transitional arrangements, and is still held while the policyholder is UK resident, is designed to be penal.
If at any time after 6 April 2000 a PPB is held, a gain will be deemed to have been made and charged to tax at the end of each policy year. The gain is calculated as 15% of premiums paid into the policy and then adjusted. The first adjustment is that the gain calculated in each previous year that the bond has been in existence is added to the premium in determining that year's gain. The impact of this is to escalate the amount chargeable each year by 15% pa. The premium is also reduced for the amounts of withdrawals that have been taken out of the bond if these have exceeded the annual 5% allowances and have been subject to tax in the UK already.
This calculation can result in a large tax charge, particularly if a bond has been held for many years already, or if the current value of the bond is less than the original premiums paid. For these reasons most policyholders will seek to avoid the charge by ensuring their bond does not fall into the definition of a PPB.
Brendan Harper is technical services consultant at Royal & Sun Alliance International Financial Services
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