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HMRC internal manual

Insurance Policyholder Taxation Manual

Types of insurance policy used for investment: guaranteed income bonds, guaranteed growth bonds and indexed bonds

Guaranteed income bonds

The ITTOIA/S504 (7) definition of ’guaranteed income bondcontract’ merely adopts the regulatory definition of classes of insurance business– life and annuity business, and linked long term business, excluding annuitycontracts and pension business. In ICTA the phrase guaranteed income bond’ is notused; the reference is to ’relevant life insurance policy’.

The description is one used by the insurance industry to describe a product that can bemade up in a number of ways. It may comprise a single life assurance policy or several,and these may be combined with a life annuity. The intention of the income bond package isto provide what looks from the customer’s point of view like an income each year,actually based on surrenders, part surrenders, or individual cluster policy maturities,and a return of capital on maturity of the bond. Humorists have suggested the use of thephrase reflects Voltaire’s view of the Holy Roman Empire.

The significance of the guaranteed income bond legislation lies in identifying types ofpayments under the contract that meet the conditions described at IPTM3550.

Guaranteed growth bonds

There are also ’guaranteed growth bonds’, where the benefits are accrued andpaid out when the bond matures.

In both cases the benefits are fixed at inception, subject to the detailed policy terms,and in that respect ’guaranteed’. Some guaranteed bonds offer the better of theinvestors’ money back, or its indexed return, and market performance, but with a cap.

Indexed bonds and others

Other types of bond may, for example, have returns linked to stock market indices.

It is a feature of life-based contracts that they are extremely flexible.

Further reference and feedback IPTM1013