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HMRC internal manual

Insurance Policyholder Taxation Manual

Permitted property: collective investment schemes

Unit trusts

Units in an authorised unit trust are permitted property that may be selected withoutmaking the policy a PPB. A unit trust is authorised if the Financial Services Authorityhas made an order of authorisation under section 243 of the Financial Services and MarketsAct 2000 (FSMA).

It is possible for an authorised unit trust to lose its authorisation. Where units in sucha trust have been selected as property determining benefits under the policy, the linkbetween the value of the units and the policy benefits must be broken to keep the policyoutside the definition of a PPB. This should be done as soon as reasonably possible afterthe unit trust has lost its authorisation.

An agreement between the insurer and the policyholder, even if not in writing, to retainthe link between the policy benefits and the units would be a variation of the terms ofthe policy to permit the selection of units in unauthorised unit trusts, causing it tobecome a PPB.

Open-ended investment companies (OEICs)

Shares held in an open-ended investment company, as defined in section 236 FSMA mayalso be selected without making the policy a PPB. The scope of the definition of OEIC isnot restricted to UK companies and an OEIC may be located overseas.

Other collective investment schemes

The PPB legislation also allows interests in other collective investment schemesresident outside the UK to be selected if it is a unit trust scheme or an arrangementcreating rights in the nature of co-ownership under the law of a territory outside the UK.

For this purpose, the PPB legislation follows the standard definition of collectiveinvestment scheme given in section 235 FSMA and the related secondary legislation(The Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001, SI2001/1062).

If the investment vehicle does not fall within the definition of collective investmentscheme then interests in it cannot be selected without making the policy a PPB. Thus, forinstance, shares in a closed-ended foreign investment company would not be permittedproperty as such a company is not a collective investment scheme under the definition inFSMA and related order.

Exchange-traded funds

The PPB Regulations do not specifically refer to exchange-traded funds (ETFs) and it isnecessary to look at the nature of the investment vehicle used to offer the ETF. If aninterest in the investment vehicle used is permitted property then an interest in theexchange-traded fund may be selected without making the policy a PPB. So, for instance, ifthe ETF is offered through an OEIC then shares in it may be selected without causing thepolicy to be a PPB.

Options, warrants and other rights to acquire interests in schemes

An option, warrant or other right to acquire shares or units in a collective investmentscheme is not property which can be selected without making the policy a PPB even ifshares or units in the scheme themselves are permitted property. Neither are options,warrants and such like ‘interests in’ overseas collective investment schemes(for the purposes of property category 7 in ITTOIA05/S520).

Further reference and feedback IPTM1013