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HMRC internal manual

Insurance Policyholder Taxation Manual

From
HM Revenue & Customs
Updated
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Options: peppercorn options

A peppercorn option is an option in the policy under which the policyholder can require the premiums to reduce to a nominal amount once the policy has run at least ten years, and is then able to make part surrenders of the policy, which is converted to whole of life.

Option in the policy

In testing at the outset whether a policy made on or after 1 April 1976 qualifies the effect of exercising any of the options in the policy must be considered. If the exercise of an option would result in a non-qualifying policy then the policy cannot be qualifying.

A policy containing a peppercorn option cannot be qualifying as explained below. It provides a good example of how the qualifying policy rules on options, substitutions and significant variations interact.

Substitution

The first option that the policyholder can exercise is to convert the policy to one with a peppercorn premium. This is a fundamental reconstruction, giving rise to a substitution of the policy with a whole of life policy. There would be regular, nominal premiums payable on the new policy and also a single premium paid at the outset relating to the transfer value of the old policy.

In testing whether the substitute policy would meet the conditions to be a qualifying policy it must be looked at as a stand-alone policy, disregarding the premium relating to the transfer value. Provided the minimum sum assured is maintained these conditions will be met, as the new policy would be a whole of life policy with regular premiums, albeit nominal. The new policy would then qualify under ICTA88/SCH15/PARA17 (2)b)(i) because the old policy had run for at least ten years - see IPTM8130.