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HMRC internal manual

Insurance Policyholder Taxation Manual

Variations, substitutions and options: introduction

Changes in the terms of a policy

Some of the more complicated qualifying policy rules are concerned with the implications of changes to the terms of a policy that is already in existence, and in particular whether the policy after the change qualifies. The relevant legislation is within ICTA88/SCH15/PARA17 to ICTA88/SCH15/PARA20.

This section of the manual deals with variations for the purposes of Paragraphs 17-20. For variations that need to be considered for the purposes of the annual premium limit with effect from 6 April 2013, please see IPTM2070+.

A change to the terms of an insurance contract may

  • be so fundamental as to bring the policy to an end and substitute a new policy
  • vary the policy in a manner that is significant or insignificant
  • vary the policy so that it must be considered for the purposes of the annual premium limit (see IPTM2080)
  • arise following the exercise by the policyholder of an option in the terms of the policy.

Contract law determines the nature of any change to a policy, with each case dependent on its own facts. However, it is possible to give guidance on the general rules and the position in many common circumstances.

Overview of the rules in paragraphs 17, 18 and 19

Paragraph 17: substitutions

ICTA88/SCH15/PARA17 is concerned with situations where a new policy is issued in substitution for an old policy in certain circumstances. There are various rules within paragraph 17 to test whether the new policy is a qualifying policy - IPTM8120 onwards.

Paragraph 18: variations

ICTA88/SCH15/PARA18 is concerned with variations in the terms of a policy. Where a variation is significant, the policy after the variation is treated for the purposes of the qualifying policy rules as if it is a ‘new’ policy issued in substitution for the ‘old’ policy before the variation. IPTM8145 and IPTM8150 explain what is meant in practice by ’significant variation’.

The tests in paragraph 17 apply in the same way to a significant variation as to a substitution. So from the point of view of whether a policy after the change is qualifying, it does not matter whether the change is a substitution or a significant variation. But where there is a substitution, it is treated as a full surrender and there may be a chargeable event - see IPTM7335.

An insignificant variation - see IPTM8160 - of a policy may affect the qualifying status of the policy for the purposes of the annual premium limit. See IPTM2080.

Paragraph 19: options

ICTA88/SCH15/PARA19 is concerned with options in a policy, which if exercised would substitute the policy with a new policy, or vary the terms of the policy in some way. A policy made on or after 1 April 1976 is tested at the outset to see if it is qualifying, and would remain qualifying under all possible circumstances where any options in the policy may or may not be exercised.

This means that the tests in paragraphs 17 and 18 are applied as if the exercise of the option in the policy would give rise to a policy in substitution or a varied policy at some future date.

Policies made before 1 April 1976 are tested when any option is exercised, according to its consequence, rather than at the start looking at all possible alternatives - see IPTM8175.

Further reference and feedback IPTM1013