HMRC internal manual

Insurance Policyholder Taxation Manual

IPTM7330 - Surrenders and part surrenders: cluster policies

Cluster policies

Some insurers offer a product commonly known as a ‘cluster policy’ or ‘bond’ whereby the sum invested by a customer is divided up equally between a number of identical life insurance policies. Typically, these are single premium policies. These will be separate policies provided that the policies are genuinely distinct and self-contained and the documentation supports this. There can be one policy document for all the clustered policies but it should be clear that the policies are separate and each policy must be uniquely designated by appropriate sub-numbering. Ideally, each policy will have a separate policy schedule showing the details of that policy, but a composite schedule may be accepted as evidence of a cluster policy provided it is clear that it relates to separate policies. Offering a cluster policy is usually to give policyholders greater flexibility in withdrawing funds than if they held one larger policy. The investor can choose to surrender fully a number of smaller policies within a cluster rather than make a part surrender of a single, larger policy.

Withdrawals of funds from a cluster policy

A policyholder who wishes to withdraw a specific sum may do so by a combination of full and part surrenders of policies within the cluster.

For instance, if the cluster comprises 20 policies with surrender value £15,750 each, a policyholder who wishes to withdraw £50,000 may fully surrender three policies with total value £47,250 and part surrender a fourth policy to the value of £2,750. Or the policyholder might make a part surrender of value £2,500 from each of the 20 policies. Depending on the chosen method, and the circumstances of the policyholder, the tax consequences can be very different in each case.

Transactions validly made cannot be reversed

A withdrawal will be legally effected as surrenders or part surrenders of policies in accordance with the terms of the policies and the instructions of the policyholder or a person authorised to act on behalf of the policyholder, such as an independent financial adviser. Once a surrender or part surrender of a policy has been validly made, as described in IPTM7325, it cannot be reversed. The tax consequences must follow from the transactions which have happened, not those which in hindsight a policyholder might have preferred to have happened because they would give a lower tax bill.

Unless there is evidence that an insurer has acted explicitly contrary to instructions from the policyholder or a person authorised to act on his or her behalf, history cannot be rewritten to change the transactions from the form that they originally took.

Where the instructions to the insurer do not specify how a withdrawal from a cluster of policies is to be effected, merely requesting the withdrawal of a specified sum, then the insurer must act in accordance with the terms and conditions of the policies. This may provide for a default position, for instance effecting the withdrawal by equal part surrenders of all the policies in the cluster, or it may be silent on the point. Only if the insurer acted contrary to those terms could the transaction be revisited.

If an insurer receives a request for withdrawal from a cluster of policies which is not completely clear on how the withdrawal is to be effected, it is advisable to check the policyholder’s intention before acting on the request.

Disproportionate gains arising on part surrenders

If a policyholder considers a gain arising from a part surrender to be wholly disproportionate to the underlying economic gain on that part surrender, they may apply to an officer of HMRC to recalculate the gain on a just and reasonable basis, following the process set out at IPTM3596. Where a gain is recalculated, insurers are not required to amend or reissue certificates.