IPTM8125 | Substitution of a qualifying policy: within ten years of the old policy being made: whether new policy qualifies

If both the old policy and the new policy issued in substitution meet the basic qualifying policy tests but the new policy takes effect within ten years of the old policy being made then the premiums payable have to be compared to determine whether the new policy qualifies. This is the test in ICTA88/SCH15/PARA17(2)(b).

Premium comparison test

Step 1: Calculate the highest premium payable under the new policy for any 12 month period falling within the period of ten years from the date that the old policy was made. In doing this calculation, any premiums of the new policy covered by the transfer of value from the old policy are not included.

Step 2: Calculate the highest premium paid for any period of 12 months under the old policy, including under any related policies as described below.

The new policy then qualifies if the amount given by step 1 is not less than half of the amount given by step 2.

There is no upper limit on the premiums payable on the new policy, so long as the policy meets the basic qualifying policy tests.

Related policies

If there has been one or more previous substitutions in the ten years before the new policy is made, step 2 of the premium comparison test extends to all previous old policies that were made in that period, not just the most recent policy. These policies are known as ‘related policies’.

For instance, suppose a new policy was made in 2019 on a substitution and earlier related policies were made in 2013, 2010 and 2008. Then the premium comparison test only applies to premiums paid on the policies made from 2010 onwards. Premiums paid on the related policy made in 2008 do not count for the test as this policy was made more than ten years before.