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HMRC internal manual

Insurance Policyholder Taxation Manual

Surrenders: fundamental reconstruction of the policy

Where the terms of a policy are changed, those changes may be so fundamental as to constitute a reconstruction bringing to an end the old contract and bringing into existence a new policy in substitution. If so, then the ending of the old policy is treated as a full surrender of the rights under the policy, with all the chargeable event consequences that might follow.

There is an exception to this rule where there is a change of life assured on a qualifying policy in certain circumstances - see IPTM7340.

What is a fundamental reconstruction?

Whether a change to a policy is fundamental is a question of contract law and can only be answered by reference to the particular facts and circumstances. But it is possible to give some general principles - see IPTM8110. These are based on the old Notes on Procedure 10 (NoP 10) issued by the Inland Revenue in 1988.

Although the guidance in IPTM8110 specifically applies to qualifying policies, advice about the distinction between changes which are merely variations and those which are fundamental reconstructions has application to non-qualifying policies also.

A variation of a policy, whether significant within the meaning of the qualifying policy rules, or not, has no chargeable event implications for non-qualifying policies.

The main changes which are regarded as fundamental are:

  • addition or removal of a life assured under the policy
  • switch from an endowment policy to a whole of life policy or vice versa
  • change of contingency, for instance addition or removal of disability benefit and critical illness cover, or a change to the cover under a joint policy from first-to-die basis to last-to-die, or vice versa.

A change in the way benefits are calculated, extending the term of the policy or making a regular premium policy paid up are not in most cases fundamental reconstructions - see IPTM8150 for more details.

A transfer of business from one insurer to another under the Part 7 FSMA2000 process sanctioned by the Court will not normally result in the fundamental reconstruction of the policies transferred but each case would need to be carefully considered on its own facts.