Many UK expats want to take advantage of the wide investment choice available through a product commonly known as a personal portfolio bond.
The product has a long list of benefits but these are not without their complications. It is important for a client returning to the UK with one of these bonds to be mindful of the tax implications of holding such a product here.
In simple terms, a PPB is a life assurance or capital redemption policy, which gives investors the freedom to invest in a wide range of assets beyond those described within the legislation.
In law, it is the life assurance company – not the policyholder – that owns the property, which in turn determines the benefits payable under the life assurance or capital redemption policy.
Under the legislation the policyholder essentially has the ability to select the property that determines the policy benefits. The policyholder retains nearly all the advantages of direct personal ownership of the policy. However, as the property is held in the ‘wrapper’ of a life assurance or capital redemption policy, the policyholder does not have to pay income tax on dividend and interest income arising from the investments. Nor do they pay capital gains tax on disposals when the investments underlying the policy are altered.
The PPB legislation is an anti-avoidance measure that imposes a yearly deemed gain on life assurance and capital redemption policies. The policyholder is able to select the property that determines the benefits.
The deemed gain is subject to income tax where the policyholder is UK tax resident. The PPB legislation applies for policy years ending on or after 6 April 2000, and the tax year 2000/01 is the first for which a PPB gain can arise.
The product has a long list of benefits but these are not without their complications
PPB tax charge
Where a policy is regarded as a PPB, the legislation imposes a tax charge on an artificial deemed gain (explained below) on the policy for policyholders who are UK resident individuals, UK resident settlors or UK resident trustees (where the settlor is not UK resident or has died).
The tax charge based on the PPB deemed gain is payable yearly for UK resident policyholders. The PPB deemed gain is calculated at the end of each policy year while the policy is in force. It does not apply on surrender, death or maturity, but previous amounts are taken into consideration, as shown in the example below.
How is it calculated and applied?
The PPB deemed gain is not based on actual gains. The PPB deemed gain assumes a gain of 15 per cent of the premium and the cumulative gains for each year the policy has been in force. The tax charge on the PPB deemed gain will be the highest rate of tax paid by the investor. Top slicing relief is not available.
The formula is: (premium + cumulative deemed gains MINUS previous excess gains) x 15 per cent = yearly deemed gain
Returning to the UK with a PPB
The test of whether a policy is a PPB is an ongoing test. If a policy was originally a PPB but its terms were varied so that it ceased to be a PPB, the PPB tax charge will not arise. The yearly PPB deemed gain arises only if a policy or contract is a PPB on the last day of the related policy year.
The following options are available:
- Do nothing, in which case the tax charge for a PPB deemed gain will apply
- Request the provider to endorse the policy and therefore restrict the assets to permissible assets. Any non-permissible assets would need to be disposed of.
As an example, let’s say the client bought the bond on 2 May 2014 and paid a premium of £250,000, held for five years and then moved back to the UK on 5 July 2018. If they didn’t endorse the bond prior to 2 May 2019, the PPB deemed gain is £44,114. This is regardless of the performance of the bond.
The client would be able to benefit from time apportionment to reduce the gain. The relief would allow the fraction of the gain relating to days spent in the UK. The calculation is: gain multiplied by the number of days in the UK divided by total days held to be taxable.
This is a very intricate and difficult-to-understand part of the tax system. To avoid hefty tax bills it is imperative a client gets advice before returning to the UK.
Looking to the future, we must question whether this tax, which has no bearing on the gain or loss, is still fit for purpose or should be overhauled.
Rachael Griffin is tax and financial planning expert at Quilter