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HMRC internal manual

Insurance Policyholder Taxation Manual

Variations and substitutions

The transitional provisions described in IPTM7795 onwardsfor policies in force at 17 March 1998 do not apply to policies that have been varied onor after 16 July 1998 so as to increase the benefits secured or extend the term.

Examples of variations not regarded as increasing the benefits

  • Switching the fund or investments to which the value of benefits under a policy are linked in a unit-linked policy
  • limiting the policyholder’s entitlement to select the property that may determine the benefits under the policy, or
  • adding an option to the policy to enable the policyholder to switch linked investments.

Cancellation and substitution

It is possible that a variation in the terms of a policy is so fundamental that itamounts to a cancellation of the policy and creates a new policy in substitution. Whetherthis is the case is a question of contract law. IPTM7335 discussesthe point generally but, in the context of PPBs, the type of variation needed to ensurethat a pre-17 March 1998 policy is not a PPB is unlikely to amount to a cancellation andsubstitution. Each case would need to be considered on its own facts and circumstances.

For example, if a policy allowed selection of shares in listed companies and otherproperty and the terms of the policy were varied to allow selection of shares in listedcompanies only then that is not likely to amount to a cancellation and substitution. Onthe other hand if the policy only allowed the selection of, say, real property, chattelsor unquoted shares, and the policy was varied to allow selection only of the propertypermitted without making it a PPB then that might well be a cancellation and substitution.

Where a variation is treated as the cancellation of a pre-17 March 1998 policy andsubstitution by a new policy, the transitional provisions cannot apply. The new policymust be tested for whether it is a PPB under the normal rules for policies made on orafter 17 March 1998.

Variation of a policy to ensure that it is not a PPB

A PPB gain is treated as arising on a policy if it is a PPB at the end of the insuranceyear. If a PPB is varied in an insurance year so that it ceases to be a PPB then no PPBgain will arise at the end of that year, or subsequent years, unless the policy becomes aPPB again. But a temporary variation would not be sufficient to prevent PPB gains fromarising.

Further reference and feedback IPTM1013