Single Premium Life Insurance Companies | Personal portfolio bond rules
PPB rules are anti-avoidance measures which are very complex but, in broad terms apply when the policyholder has the ability to select the policy investments.
Where the policyholder wishes to direct or influence the investments held within the policy, then in order to retain the UK tax deferral benefits of the policy, the investments must broadly be restricted to collective investment funds (provided the investment funds are available to all other policyholders or an unconnected class of policyholders) or cash. If the policyholder wishes to hold single equities or bonds within the policy, then the investment management of the underlying policy investments must be entirely delegated to an unconnected investment manager.
Where investments held within the policy are to consist of single equities and/or bonds and the policyholder directs or influences the investment decisions as relate to the policy investments, then the policy may be reclassified as a Personal Portfolio Bond (“PPB”). In such a case, a gain equal to 15% of the premiums invested in the policy is deemed to accrue each year (irrespective of any surrender or any actual increase in value of the policy) and the policyholder will be subject to income tax at their marginal income tax rate on this gain on an arising basis.
It is important to note that where the policy is treated as a PPB, it is not only a deemed gain equal to 15% of the premiums invested in the policy which is treated as arising each year, but in each successive year, 15% of previous years’ deemed gains are also subject to charge, so the income tax charges become extremely penal the longer the policy remains regarded as a PPB.
Where the policyholder wished to hold single equities or bonds, but determine the holdings at the outset, it is possible for the life insurance company to create a dedicated collective fund with a prospectus,(which would be open to other investors), without the policy being regarded as a PPB, provided the ongoing investment management was carried out by an unconnected investment manager.
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