IPTM7345 - Part surrenders: loans on policies and contracts

Loan on a policy or contract is deemed to be a part surrender

Where an insurer makes a loan to a person who would be chargeable if a gain arose on a policy or contract under the chargeable event regime, the making of the loan is treated as a part surrender. How this affects the chargeable event computations, including the treatment of loan repayments, is covered in IPTM3510.

For these purposes, a loan is treated as made by an insurer if it is made by arrangement with the insurer and a loan is treated as made to a person if it is made at that person’s direction.

Meaning of ‘arrangement’

‘Arrangement’ is not defined in tax legislation and on the ordinary meaning of the word it has a wide scope. Whether there is an arrangement in a particular instance depends on the facts and circumstances.

Where an insurer helps to market loans from companies within the same group secured on policies it has issued, or provides the policyholder details to group companies to help them market such loans, then it is likely that there is an arrangement. The payment of commission to the insurer by the lender is also a strong pointer to there being an arrangement. This may also be the case even if the loans are provided by a third-party lender with whom the insurer has an agreement to refer prospective borrowers in return for commission or other benefits such as reciprocal referrals.

On the other hand, if the first involvement of the insurer occurs after the group company has already offered the loan then it is less likely that there is an arrangement. For example, the insurer’s role might be limited to administering the charge over the rights under the policy after the loan has been made or confirming the value of the policy after a conditional offer of a loan but before the amount of the loan is finalised.

Exceptions

There are some circumstances where a loan on a policy or contract is not treated as a part surrender. These include where the loan is made:

• on a qualifying policy at a commercial rate of interest – what is a commercial rate is a question of fact and insurers should have little difficulty establishing this
• to trustees on a policy or contract made before 9 April 2003
• on a policy or contract made before 27 March 1974, or
• on a policy or contract made before 14 March 1989 that is owned by a company, held on trust created by a company or as security for a debt owed by a company.