New regulations expanding personal portfolio bond asset types in force from January

Out-Law Analysis | 12 Dec 2017 | 5:05 pm | 2 min. read

ANALYSIS: New regulations will permit additional property categories to be held within a personal portfolio bond (PPB) from 1 January 2018, making these bonds potentially more attractive to investors.

The UK government announced in the 2016 Budget that it would review the categories of permitted investments which would be held in a policy of life insurance, life annuity or capital redemption policy without it becoming taxable as a PPB.

This change is good news for holders of single premium investment policies as it widens the investments that they can select for their policy to invest in without triggering the  PPB rules. Updating the rules to increase the scope of investments that can be held in a single premium investment bond sold by UK and offshore companies into the UK is a very welcome development, allowing for more sophisticated asset allocation strategies within the policy wrapper and increasing the potential attractiveness of these investment products for the life industry.

The PPB rules

Taxable gains from life insurance policies, including capital redemption policies and contracts for life annuities, arise when value is taken from a policy; typically when the policy matures or is partly surrendered.

The PPB rules prevent an individual from placing their personal assets within a life insurance policy in order to defer any tax charges on the income or gains arising from those assets until they take cash from the policy. Where a life insurance policy falls within the definition of a PPB, an annual tax charge is levied to deter such action.

A life insurance policy will be a PPB if the terms allow the policyholder to select some or all of the underlying assets ('property'). However, if all of the assets which may be selected fall within certain listed permitted property categories, the policy will not be a PPB.

The permitted assets on the current list are:

  • property in an insurers' internal linked fund;
  • units in an authorised unit trust;
  • shares in an investment trust;
  • shares in an open-ended investment company;
  • cash;
  • life insurance policies; and
  • an interest in certain non-UK collective investment schemes.

The practical effect of extending the permitted asset categories is to grant a tax deferral where those assets are held within a life policy wrapper. Under the current rules, holders of those assets would suffer an annual tax charge on the income arising from the investment.

Holders of PPBs suffer an annual deemed taxable gain measured broadly as 15% of the premium, plus 15% of previous PPB charges. No top-slicing relief is available.

The new permitted investments

The categories of permitted assets have not changed in any material way since 1999, despite the development of new investment products since that time. The regulations add three new categories with effect from 1 January 2018:

  • real estate investment trusts (both UK and foreign equivalents);
  • overseas equivalents of UK approved investment trusts; and
  • UK authorised contractual schemes.

The new regulations also remove category 7(a), an interest in a collective investment scheme constituted by a company resident outside the UK other than an open-ended investment company, as category 7(a) is incapable of holding any property.

Real estate investment trusts

A real estate investment trust (REIT) is a limited company which invests mainly in property. Its shares must be widely held.

Investors own shares in the UK REIT, and the company manages the underlying investments. The UK REIT is exempt from UK tax on the income and gains of its property rental business.

It is, however, required to distribute at least 90% of its income to shareholders, and those shareholders are taxed as receiving property income. The shareholders, therefore, get a broadly similar return as if he or she had invested directly in the property.

Overseas equivalent of approved investment trusts

Investment trusts are already included within the permitted asset categories. The regulations will permit overseas equivalents of investment trusts to be included within the permitted property categories.

Authorised contractual schemes

An authorised contractual scheme (ACS) is a type of investment fund, authorised and regulated by the Financial Conduct Authority (FCA), which could be constituted as a limited partnership or as a contractual co-ownership arrangement. The ACS has an authorised manager responsible for investment decisions. Policyholders would not be permitted to select an investment in an ACS that held their 'personal property'.

Bruno Geiringer is a life insurance expert at Pinsent Masons, the law firm behind Out-Law.com.