Annex 1: Minor changes in the law made by the Act: Change 157: Gains from contracts for life insurance etc: time limit for policy holders previously not resident in the United Kingdom to vary policy or contract so it is not a personal portfolio bond: paragraph 125 of Schedule 2
This change gives statutory effect to Part 3 of ESC B53.
Regulation 3 of the Personal Portfolio Bonds (Tax) Regulations 1999 SI 1999/1029 contains exceptions from the definition of “personal portfolio bond” for certain pre-17 March 1998 policies or contracts. One exception applies to a policy or contract which is varied before the end of the first insurance year which begins on or after 6 April 1999 to restrict the kinds of property or index which may be selected under its terms.
A further refinement applies if the policy holder was not resident in the United Kingdom on 17 March 1998, but later becomes UK resident. To prevent the policy or contract from being a personal portfolio bond, the policy holder may vary it before the later of the end of the first insurance year which begins on or after 6 April 1999, and the end of the first insurance year which begins after the time when the policy holder first becomes resident in the United Kingdom after 17 March 1998.
An individual who becomes UK resident during a tax year is treated as being resident for the whole of that tax year. So where the insurance year in relation to a policy or contract begins shortly after the beginning of a tax year, and the policy holder arrives in the United Kingdom close to the end of the tax year, the period for variation of the policy or contract may end shortly after the policy holder’s arrival in the United Kingdom.
Part 3 of the concession moderates the effect of this rule in a case where a policy holder arrives in the United Kingdom after 17 March 1998 to take up permanent residence, or to stay for at least two years. In that case the insurance year within which the policy or contract may be varied is the first insurance year to begin on or after the date the policy holder first arrives in the United Kingdom to take up permanent residence or to stay for at least two years.
Paragraph 125 of Schedule 2 to this Act (“policy holders becoming permanently UK resident after 17th March 1998”) gives statutory effect to this part of the concession.
It applies where a policy holder was not UK resident on 17 March 1998, but becomes UK resident after that time. The policy holder must, on the date of his or her arrival by virtue of which he or she becomes UK resident, have the intention to take up permanent residence, or to stay for at least two years.
Where those conditions are met the policy or contract may be varied to take it outside the definition of “personal portfolio bond” before the later of the end of the first insurance year beginning on or after 6 April 1999, and the end of the first insurance year beginning on or after the date of his arrival by virtue of which he became UK resident.
Part 3 of ESC B53 does not say in terms that no gain arises under the Personal Portfolio Bonds (Tax) Regulations 1999 in relation to any insurance year ending after the date on which the policy holder became UK resident, but before the insurance year in which the variation is made. This is how the ESC is operated in practice, and the paragraph mentioned above spells this out.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with current practice.