IPTM8215 - Non-contractual conversion of a policy to paid-up

Variation of a policy to convert it to paid-up

IPTM8210 describes what is meant by converting a policy to paid-up. If the terms of a qualifying policy do not provide for a policy to be converted to paid-up but the policy is converted to paid-up by agreement between the policyholder and the insurer then that would be a significant variation. The policy would need to be re-tested to see whether it remains qualifying. As with variations of a policy generally, an immediate chargeable event cannot arise on making the policy paid-up, however, the application of the annual premium limit must be considered – see IPTM2080.

The policy would remain qualifying unless it was made paid-up within ten years of its being made or within ten years of the most recent previous significant variation of the policy.

Previous treatment of non-contractual conversions of policies to paid-up

In the past, insurers may have treated a non-contractual conversion of a policy to paid-up by agreement between the insurer and the policyholder as a fundamental reconstruction rather than a significant variation. Under this treatment, the policy following the conversion to paid-up would be treated as a new policy issued in substitution of the old policy on conversion.

The Inland Revenue clarified the view in November 2003 that such a conversion should be treated as a significant variation, not a cancellation and substitution. This interpretation applies to the tax treatment of ongoing policies, even if they were made paid-up before the clarification.

In deciding whether chargeable event certificates should be issued on paid-up policies, insurers should check whether the qualifying status of the policy is correctly flagged. Insurers are not liable to a penalty if they issue certificates when no chargeable event or gain has arisen, in contrast to the position where certificates are incorrect.