HM Revenue & Customs is consulting the wealth management industry on proposed changes that would extend the range of assets which can be linked to a life assurance policy without triggering the penal “personal portfolio bond” rules.
The personal portfolio bond (PPB) rules were introduced to deter the holding of “personal assets” (e.g., shares in a family company) within a life insurance policy. Under these rules, 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 definition of a PPB includes a life insurance policy, the terms of which allow the policyholder to select some or all of the assets in which the policy premiums will be invested.
A policy is not a PPB if it holds only permitted assets. These permitted assets 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
* Life insurance policies
* An interest in certain non-UK collective investment schemes
The categories of permitted assets have not materially changed since 1999 – despite the development of new investment products since that time. HMRC is reviewing these permitted assets and the consultation examines the possibility of adding three new categories:
1) real estate investment trusts (both UK and foreign equivalents);
2) overseas equivalents of UK approved investment trusts; and
3) UK authorised contractual schemes.
Real estate investment trusts [REIT]
A 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 its shareholders, and those shareholders are taxed as receiving property income. The shareholders therefore gets a broadly similar return as if he or she had invested directly in the property.
The consultation will also look at arguments for including foreign equivalents of UK REITs within the list of permitted property categories.
Overseas equivalent of approved investment trusts
Investment trusts are already included within the permitted asset categories. HMRC is examining suggestions that overseas equivalents of investment trusts be included within the permitted property categories.
Under the current rules, UK investment trusts must have HMRC approval, and to obtain such approval the investment trust must meet certain conditions – an objective test. The consultation is seeking views on how an overseas equivalent could be defined.
Authorised Contractual Schemes
An Authorised Contractual Scheme (ACS) is a type of investment fund (authorised and regulated by the 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”.
The practical effect of extending the permitted asset categories would be to grant a tax deferral where such assets were held within a life policy wrapper. Currently the holders of such assets would suffer an annual tax charge on the income arising from the investment.
Widening the range of permissible assets would also enable the development of more sophisticated asset allocation strategies within the policy wrapper.
The consultation document is available here, and closes on 3 October.