Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

Insurance Policyholder Taxation Manual

From
HM Revenue & Customs
Updated
, see all updates

Part surrenders: loans on policies and contracts

Loan on a policy or contract is deemed to be a part surrender

Where an insurer makes a loan to a person who would be chargeable if a gain arose on apolicy or contract under the chargeable event regime, the making of the loan is treated asa part surrender. How this affects the chargeable event computations, including thetreatment of loan repayments, is covered in IPTM3510.

For these purposes, a loan is treated as made by an insurer if it is made by arrangementwith the insurer and a loan is treated as made to a person if it is made at thatperson’s direction.

Meaning of ‘arrangement’

‘Arrangement’ is not defined in tax legislation and on the ordinary meaningof the word it has a wide scope. Whether there is an arrangement in a particular instancedepends on the facts and circumstances.

Where an insurer helps to market loans from companies within the same group secured onpolicies it has issued, or provides the policyholder details to group companies to helpthem market such loans then it is likely that there is an arrangement. The payment ofcommission to the insurer by the lender is also a strong pointer to there being anarrangement. This may also be the case even if the loans are provided by a third-partylender with whom the insurer has an agreement to refer prospective borrowers in return forcommission or other benefits such as reciprocal referrals.

On the other hand, if the first involvement of the insurer occurs after the group companyhas already offered the loan then it is less likely that there is an arrangement. Forexample, the insurer’s role might be limited to administering the charge over therights under the policy after the loan has been made or confirming the value of the policyafter a conditional offer of a loan but before the amount of the loan is finalised.

Exceptions

There are some circumstances where a loan on a policy or contract is not treated as apart surrender. These include where the loan is made

  • on a qualifying policy at a commercial rate of interest - what is a commercial rate is a question of fact and insurers should have little difficulty establishing this
  • to trustees on a policy or contract made before 9 April 2003
  • on a policy or contract made before 27 March 1974
  • on a policy or contract made before 14 March 1989 that is owned by a company, held on trust created by a company or as security for a debt owed by a company.
Further reference and feedback IPTM1013