IPTM8115 | Substitutions: pre-25 February 1988 policies

In 1988, the Inland Revenue received legal advice to the effect that the conversion of a policy between endowment, whole of life or term assurance brings the policy to an end and substitutes a new policy. This clarification led to the announcement of a change of view on the certification of qualifying policies that contained conversion options and advice on how to treat existing policies. A policy issued between 1 April 1976 and 6 April 2013 cannot be qualifying unless it has been certified by HMRC as qualifying or is in a standard form that has been certified as qualifying - IPTM8305 onwards.

Policies certified on or after 25 February 1988

Under the legal advice received in 1988 the exercise of a conversion option in a policy would result in a new contract.

The Revenue announced that policies containing conversion options would no longer be certified as qualifying from 25 February 1988 onwards unless the substituted policy would itself be qualifying under the normal rules.

So, for instance, certification of a policy with a peppercorn option or a deposit option, as described below, was no longer possible from 25 February 1988. This is because the transfer value of the old policy would be applied as premium to the substituted policy, which would cause the qualifying policy tests to be failed. This is explained further at IPTM8180 and IPTM8185.

Treatment of policies certified before 25 February 1988

Before 25 February 1988, the Revenue was prepared to certify as qualifying policies that contained certain conversion options in their terms. These included:

• an option to convert a policy from whole life to endowment, whereby benefits become payable at a maturity date rather than only on death – the premiums may be increased and/or the sum assured reduced

• a ‘reinvestment option’ or ‘deposit option’ to convert the policy from endowment to whole of life whereby only part of the proceeds payable on maturity are withdrawn, with the balance reinvested in a whole of life policy, usually with a surrender facility

• a ‘peppercorn option’ to convert the policy from endowment to whole of life whereby the proceeds are not withdrawn but nominal premiums (usually £1 per year) become payable for life and surrenders are permitted at any time.

The strict position is that the exercise of a conversion option would result in a new policy. However, where the option is in a certified policy that was in existence before 25 February 1988, its exercise would be treated as a variation and qualifying status will not be affected. This is the case even though the option may be exercised on or after 25 February 1988.