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HMRC internal manual

Insurance Policyholder Taxation Manual

HM Revenue & Customs
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Variations which increase the benefits secured or extend the term

Over the years, there have been quite a few changes to the chargeable event gain rules. Often, the new rule only applies to policies or contracts made on or after a certain date unless the policy or contract has been ’varied so as to increase the benefits secured or extend the ‘term’, for instance when Life Assurance Premium Relief was abolished in 1984.

Advice on what is meant in practice by this phrase was included in the Inland Revenue’s Notes on Procedure No 8, which was issued to insurers in 1984, and this section of the guidance is based on that advice. A variation is legally made when one party to the policy or contract notifies acceptance of its terms to the other.

’Term’ means the time that the policy runs, from outset to maturity. ’Benefits secured’ has a wide meaning and encompasses any benefits that may be offered under the policy. It includes, for instance, bonuses that have not yet been awarded. It is not restricted to guaranteed sums. An increase in premiums will always indicate an increase in benefits secured.

Whether the term is extended by a variation of a policy will normally be clear but whether the benefits secured are increased may be less clear. Focus is on the benefits secured so maintaining the benefits while reducing the premium does not increase the benefits.

It is possible for there to be increases in benefits secured without there being a variation of the policy terms, for instance if a policy provides as part of its terms that premiums, and corresponding benefits, increase at set intervals automatically.

Examples of variations which increase the benefits or extend the term

The following are examples of variations regarded as increasing the benefits secured or extending the term of a policy:

  • reduction in term of endowment (regular premium) policy accompanied by increase in premiums
  • conversion from without to with-profits, or without-profits to unit-linked, for the same sum assured
  • adding to existing disability benefits
  • adding to existing accidental death benefits
  • incorporation of new accidental death benefit
  • addition of an option not previously included
  • extension of the term of a policy, whether or not for an increased premium
  • extension of the premium paying term of a whole life policy whose premiums were payable for a limited period - but not where premiums are reduced so that the same total amount is payable over a longer period.
Further reference and feedback IPTM1013