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HMRC internal manual

Insurance Policyholder Taxation Manual

Options in policies: qualifying tests

An option is a right included in the terms of a policy that allows the policyholder to make changes to the policy. If the policyholder exercises that right then the insurer is bound to accept the change.

Whether a policy contains an option, and the scope of that option, will depend on the terms of the policy, which are governed by general contract law. The treatment under the qualifying policy rules will follow from the contractual position.

Options in policies made on or after 1 April 1976

Where a policy was made on or after 1 April 1976, the effect of exercising any option in the policy must be taken into account in determining at the outset whether the policy meets the conditions to be certified as qualifying.

On the exercise of an option there will be a change in the policy that may be either a variation of the policy or a substitution of the policy with a new policy, depending on the nature of the change.

In testing at the outset whether the original policy qualifies, it is necessary to check that if the option were to be exercised at some future date then

  • any policy issued in substitution would also meet the qualifying policy tests, as described at IPTM8120 to IPTM8130, and
  • any significant variation would leave the policy qualifying in accordance with the tests described at IPTM8165 and IPTM8170.

If the exercise of an option in the policy would alter the policy, by substitution or significant variation, in such a way that it would not qualify after the change, then the policy will fail the qualifying policy tests at the outset and cannot be certified.

A policy may contain an option to allow a policyholder to make a variation that is not a significant variation (see IPTM8145) to the policy. From 21 March 2012, the variation may need to be considered for the purposes of the annual premium limit - see IPTM2080. Once a policy is noted as qualifying, taking into account any options in the policy, it is not necessary to retest the policy when any option in the policy actually is exercised.