Offshore Bonds Taxation explained

17 November 2020

Example: personal portfolio bond penalties

A policy taken out on 3 June 2012 will have an insurance year ending on 2 June 2013. The second insurance year begins on 3 June 2013 and ends on 2 June 2014 (and so on).

Where a policy is a PPB at the end of the insurance year, there is a PPB gain if the sum of premiums paid and total amount of earlier PPB excesses exceeds the total amount of part surrender gains. The PPB gain is equal to 15% of the excess. This calculation is not performed for the final insurance year.

The penal effect of this legislation can be illustrated with a simple example.

Sam is a UK resident 40% taxpayer who invests £100,000 in a bond caught by the

PPB rules and fully encashes it after 5 years for £140,000.

Insurance year 1 gain : £100,000×15% = £15,000 (tax due £6,000)

Insurance year 2 gain: (£100,000+£15,000)x15% = £17,250 (tax due £6,900)

Insurance year 3 gain: (£100,000+£15,000+£17,250)x15% = £19,838 (tax due £7,935)

Insurance year 4 gain: (£100,000+£15,000+£17,250+£19,838)x15% = £22,813 (tax due £9,125)

Insurance year 5 gain: (£100,000+£15,000+£17,250+£19,838+£22,813)x15% = £26,235 (tax due £10,494)

Encashment:                           £

Proceeds                                 140,000

Less Premium                        (100,000)

Less total PPB gains              (101,136)

Deficiency                               (61,136)

Sam would get no relief for this deficiency since he incurred no previous chargeable event gains on part surrender or part assignment. Accordingly he will have paid total tax of £40,454 on an economic bond gain of £40,000.

The PPB legislation (S516 ITTOIA 2005) only applies to policies where:

  • Some or all of the benefits are determined by reference in some way to an index or property of any description, and
  • Some or all of that property or the index may be selected by the policyholder, or somebody connected with the policyholder or acting on their behalf.

Except where the terms of the policy only permit the selection of certain narrowly defined property or indices. In particular a policy is not a PPB if all of the property, which may be selected falls within the following categories (S520 ITTOIA 2005).

  1. An internal linked fund of the insurer
  2. Units in an authorised unit trust
  3. Shares in an approved investment trust
  4. Shares in an open-ended investment company (OEIC)
  5. Cash (but not acquired for speculative purposes)
  6. A life policy, life annuity or capital redemption policy (unless itself linked to a PPB)
  7. An interest in a collective investment scheme constituted by:

– a company which is non-UK resident (other than an OEIC)

– a unit trust scheme the trustees of which are non-UK resident

– any other non-UK arrangements which create co-ownership rights.

In addition the opportunity to select must broadly be available to other policyholders.

It is important to note that a critical factor in determining whether a policy is a PPB is the scope of a policyholder’s ability to select a property or index under the terms of the policy,

rather than what in practice is selected. Where the policyholder genuinely does not have the ability to select property or an index, even if that property or index is not within any of the permitted categories, the policy will not be a PPB, although the presence of personal assets would test this analysis.

Legislation was introduced in Finance Bill 2017 to add new subsections to Section 520 of Income Tax (Trading and Other Income) Act 2005. This provides a power to update the table contained in Section 520 (2) of Income Tax (Trading and Other Income) Act 2005, in secondary legislation. Regulations to remove a property category will be subject to the affirmative procedure, whilst additions will be subject to the negative procedure.

Regulations have been published adding UK real estate investment trusts, overseas equivalents of investment trust companies and authorised contractual schemes to the table, and removing category 7a. An interest in a collective investment scheme constituted by a company resident outside the UK, other than an open-ended investment company.

Top-slicing relief is not available on gains on PPB events and therefore insurers must always report the number of years as 1 on chargeable event certificates (see later section).

Overseas tax issues

Where an overseas life company issues a policy to a UK investor who subsequently relocates to that same country, then tax implications can potentially arise. For example the company may then be obliged to deduct tax from the policy and pay it to the host tax authorities in recognition that the policyholder then resides in that territory. In addition, if the overseas jurisdiction has a system which taxes gifts, acquisitions or estates then the policy might fall within that regime in certain situations. Exemptions and reliefs might apply but each investment would need to be considered on a case by case basis.

Chargeable event certificates

Overseas insurers fall within the scope of the chargeable event reporting rules where a minimum level of business is conducted with UK residents. Accordingly, in most circumstances, information about chargeable events must be provided to policyholders and HMRC in broadly similar fashion to that provided by UK insurers.

Where the level of business with UK residents of an overseas insurer exceeds a £1 million threshold, it is required to have a person in the UK acting as its tax representative unless it is released by HMRC from this requirement where certain conditions are met. For example the insurer may supply the information directly.

The main duties of a tax representative are to provide information about chargeable events and gains to policyholders and HMRC.

Policyholder resident in the UK?

An insurer is not required to take active steps to establish whether an individual policyholder is resident in the UK – that is a matter for HMRC. The insurer must act according to the residence status that is indicated by the information in its possession.

An insurer does not need to ask policyholders for information that it doesn’t need for business reasons, or take active steps to determine where policyholders are resident. It should however act upon any relevant information that it receives.

If the insurer has a live correspondence address for the policyholder then it should treat the policyholder as resident in the country, unless it has other information indicating that the policyholder is actually resident in another country. If the insurer has reason to believe that the address is not where the policyholder lives, but has no information about the policyholder’s place of residence, then there is no requirement for the insurer to establish the place of residence unless it chooses to do so for its own purposes.

There may be circumstances in which the insurer has no information about where a policyholder lives at the time of the event either directly from the policyholder or via an intermediary. In the absence of any contrary evidence, an insurer should assume that the policyholder is resident in the UK if:

  • It receives a request to pay the policy benefits to an address in the UK
  • It receives a request to pay policy benefits on maturity or surrender directly to a UK bank or building society account, or
  • A new policy is sold through a UK-based intermediary and the insurer has not received any notification of an overseas address either at the time of the sale or subsequently.

Information to be provided to UK resident policyholders

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