Friendly society tax exempt policies: qualifying policy rules: substitutions and variations
Where a new policy is issued in substitution for a tax exempt qualifying policy, for instance on a change of life assured, the value of the old policy will most likely be applied as premium in the first year of the new policy. This will mean that the new policy probably cannot be written as tax exempt business because it is likely that the transfer value applied as premium will cause the tax exempt premium limits to be breached in the first year of the new policy.
However, it may be possible for the new policy to be written as a taxable qualifying policy because the general qualifying policy rules on substitutions in ICTA88/SCH15/PARA17 also apply - see IPTM8120 onwards. The transfer value applied as premium to the new policy is disregarded in testing whether the new policy qualifies in its own right.
If a tax exempt qualifying policy is varied then it must be re-tested to check whether it still meets the conditions to qualify. How the tests are applied following a variation depends on the condition that is being tested.
Variations that affect the premiums payable or the term or premium paying term
In re-testing the policy to see if it meets the premium and term conditions in ICTA88/SCH15/PARA3 (2) - IPTM8425 and IPTM8430 - the tests must be applied from the date that the policy was made not the date of the variation.
This means that any variation that alters the annual level of premium will cause the policy to become non-qualifying because the requirement for premiums to be of equal or rateable amounts will be breached.
This also means that if the term of the policy is extended by a variation of the policy, the conditions on the minimum length of the term and premium paying term will continue to be met, even if the extension is only for a short period. This is because following the variation, these conditions must be tested by reference to the policy start date.
Variations that affect the capital sum assured
In re-testing the policy to see if it meets the conditions on the minimum sum assured in ICTA88/SCH15/PARA3 subparagraphs (5) to (11) - IPTM8420 - the tests must be applied from the date of variation, not the date the policy was made.
This might be relevant if, for instance, the term of the policy is extended by variation. The test for the minimum sum assured following the variation would apply to premiums payable under the varied policy as if it were a new policy made on the date of variation, not to premiums paid and payable since the start of the policy.
A variation of a tax exempt qualifying policy that does not affect the terms in any significant respect has no bearing on whether the policy qualifies. Whether a variation is significant or insignificant is covered at IPTM8150 to IPTM8160. The premium limit that applies to a tax exempt qualifying policy means they are not capable of breaching the annual premium limit described at IPTM2070+.
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