Fundamental concepts: what is a capital redemption policy?
Capital redemption policies, though issued by insurance companies, are not strictly speaking insurance products. They were once known as investment bond contracts, which is more descriptive but needs to be distinguished from the type of life policy investment bond described at IPTM1100. Under capital redemption policies, one or more fixed sums is paid to an insurer under a contract pursuant to which one or more specified amounts is paid out at some later time or times, on the basis of an actuarial calculation. Typically the contracts take the form of
- an annuity certain, where a capital sum is used to buy an annuity for a fixed term not contingent on life, see IPTM4200, or
- a sinking fund where regular sums are paid in to secure a capital sum at some later date, for example against the need to find a premium payment to renew a lease.
The statutory definition of capital redemption business is at ICTA88/S458 (3). Contracts within such business are long term insurance business but not life business. A capital redemption policy that creates a debtor/creditor relationship, with an agreement to return the sum advanced, is known as a capital redemption bond and is similar in nature to a relevant or deeply discounted security, see SAIM3000. However, such bonds, which may only be sold by an insurer, are removed from the scope of the deeply discounted securities income tax charge of ITTOIA/S427 onwards.
Gains on capital redemption policies are taxed on individuals in a broadly similar way to those on life policies. From 10 February 2005, capital redemption bonds, where there is an identifiable debtor/creditor relationship, are charged to corporation tax under the loan relationship rules of FA96/S80 onwards.
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