IPTM3660 - Personal portfolio bonds: calculation method: example

Facts

Mr White took out a life policy at the start of insurance year 1 with a premium of £5,000. During year 4 he made a withdrawal of £3,500 and during year 7 a further withdrawal of £2,750. A further premium of £2,000 was paid in year 9. The policy was surrendered in year 11 for £20,500.

Gains on ‘excess events’

Under the rules described in IPTM3560, gains arise on excess events at the ends of insurance years 4 and 7 as follows:

Year 4: £2,500 on the withdrawal of £3,500 (that is, £3,500 – £5,000 x 4/20)

Year 7: £2,000 on the withdrawal of £2,750 (that is, £2,750 – £5,000 x 3/20)

Calculation of annual PPB gains

Year

y

Premiums paid, years 1 to end year y (A)

Cumulative amount of PPB excesses for years 1 to (y - 1) (B)

Aggregate part surrender gains for years 1 to (y - 1) (C)

PPB gain for year y =

15%(A + B - C)
	1	5,000	Nil	Nil	750
	2	5,000	750	Nil	862
	3	5,000	1,612	Nil	991
	4	5,000	2,603	Nil	1,140
	5	5,000	3,743	2,500	936
	6	5,000	4,679	2,500	1,076
	7	5,000	5,755	2,500	1,238
	8	5,000	6,993	4,500	1,123
	9	7,000	8,116	4,500	1,592
	10	7,000	9,708	4,500	1,831
	11	7,000	11,539	4,500	No gain

These calculations must be carried out in full even if year 1 ends before 6 April 2000, the date on which the PPB rules took effect. But the PPB gains are only taxable for insurance years ending on or after 6 April 2000. Then each PPB gain is treated as arising on a chargeable event (a ‘personal portfolio bond event’) occurring at the end of the insurance year and is taxable in the tax year in which the event occurred. No PPB gain can arise in the final year.

Calculation of gain on final surrender in year 11

Applying IPTM3510, Total Benefits (TB) – Total Deductions (TD) – Previous Gains (PG)

TB = £3,500 + £2,750 + £20,500 = £26,750

TD = £5,000 + £2,000 = £7,000

PG = £2,500 + £2,000 (gains on ‘excess events’) + £11,539 (PPB gains) = £16,039

So, gain on surrender is £26,750 – £7,000 – £16,039 = £3,711.