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HMRC internal manual

Insurance Policyholder Taxation Manual

HM Revenue & Customs
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Qualifying policies and life assurance premium relief: mortgage endowments

Endowment policies

Endowment assurance policies - strictly, ’life or endowment policies’ -secure payment of a capital sum if the assured life survives a specified term, or onearlier death or disability. They may be with- or without-profits, see IPTM1410, or unit-linked, see IPTM1400.They have been commonly used in connection with property mortgages.

Typically the borrower takes out a loan and pays interest on it plus premiums to aqualifying mortgage endowment policy. On maturity, the capital sum payable on the policyis intended to pay off the loan and perhaps provide an additional benefit.

If the policy is largely invested in equities, these arrangements amount to borrowing tobenefit from the acquisition of shares, on the assumption that the returns on these -dividends and capital gains - will exceed the interest payable on the loan plusadministrative charges. There is therefore a degree of risk that is absent from repaymentmortgages and this was not always clear to the borrower. Problems became acute in the bearmarket which followed the bursting of the bubble in December 1999, thoughallegations of mis-selling were already common and many cases had been referred to theFinancial Ombudsman Service.

This state of affairs created significant tax problems, in two main categories

  • policy reviews by the insurer, with possible increase in premiums
  • redress payments following guidance from the Financial Ombudsman Service.

Not all endowment policies are affected. Some non-profit policies guarantee to pay offthe loan.

Pure endowment policies, which pay out only if the life assured survives the specifiedterm, also exist and are sometimes used in conjunction with inheritance tax planning, see IHTM20103.

Further reference and feedback IPTM1013