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HMRC internal manual

Insurance Policyholder Taxation Manual

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HM Revenue & Customs
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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 anumber of identical life insurance policies. Typically, these are single premium policies.These will be separate policies provided that the policies are genuinely distinct andself-contained and the documentation supports this. There can be one policy document forall the clustered policies but it should be clear that the policies are separate and eachpolicy must be uniquely designated by appropriate sub-numbering. Ideally, each policy willhave a separate policy schedule showing the details of that policy but a compositeschedule may be accepted as evidence of a cluster policy provided it is clear that itrelates to separate policies. Offering a cluster policy is usually to give policyholdersgreater flexibility in withdrawing funds than if they held one larger policy. The investorcan choose to surrender fully a number of smaller policies within a cluster rather thanmake 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 fulland part surrenders of policies within the cluster.

For instance, if the cluster comprises 20 policies with surrender value £15,750 each apolicyholder who wishes to withdraw £50,000 may fully surrender three policies with totalvalue £47,250 and part surrender a fourth policy to the value of £2,750. Or thepolicyholder 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 taxconsequences 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 inaccordance with the terms of the policies and the instructions of the policyholder or aperson authorised to act on behalf of the policyholder, such as an IFA. Once a surrenderor part surrender of a policy has been validly made, as described in IPTM7325, it cannot be reversed. The tax consequences must followfrom the transactions which have happened, not those which in hindsight a policyholdermight 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 instructionsfrom the policyholder or a person authorised to act on his or her behalf, history cannotbe 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 ofpolicies is to be effected, merely requesting the withdrawal of a specified sum, then theinsurer must act in accordance with the terms and conditions of the policies. This mayprovide for a default position, for instance effecting the withdrawal by equal partsurrenders of all the policies in the cluster, or it may be silent on the point. Only ifthe 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 notcompletely clear on how the withdrawal is to be effected, it is advisable to check thepolicyholder’s intention before acting on the request.

Further reference and feedback IPTM1013