IPTM7825 - Personal portfolio bonds (PPB): variations and substitutions

The transitional provisions described in IPTM7795 onwards for policies in force at 17 March 1998 do not apply to policies that have been varied on or after 16 July 1998 so as to increase the benefits secured or extend the term.

Examples of variations not regarded as increasing the benefits

  • Switching the fund or investments to which the value of benefits under a policy are linked in a unit-linked policy
  • limiting the policyholder’s entitlement to select the property that may determine the benefits under the policy, or
  • adding an option to the policy to enable the policyholder to switch linked investments.

Cancellation and substitution

It is possible that a variation in the terms of a policy is so fundamental that it amounts to a cancellation of the policy and creates a new policy in substitution. Whether this is the case is a question of contract law. IPTM7335 discusses the point generally but, in the context of PPBs, the type of variation needed to ensure that a pre-17 March 1998 policy is not a PPB is unlikely to amount to a cancellation and substitution. Each case would need to be considered on its own facts and circumstances.

For example, if a policy allowed selection of shares in listed companies and other property and the terms of the policy were varied to allow selection of shares in listed companies only then that is not likely to amount to a cancellation and substitution. On the other hand if the policy only allowed the selection of, say, real property, chattels or unquoted shares, and the policy was varied to allow selection only of the property permitted without making it a PPB then that might well be a cancellation and substitution.

Where a variation is treated as the cancellation of a pre-17 March 1998 policy and substitution by a new policy, the transitional provisions cannot apply. The new policy must be tested for whether it is a PPB under the normal rules for policies made on or after 17 March 1998.

Variation of a policy to ensure that it is not a PPB

A PPB gain is treated as arising on a policy if it is a PPB at the end of the insurance year. If a PPB is varied in an insurance year so that it ceases to be a PPB then no PPB gain will arise at the end of that year, or subsequent years, unless the policy becomes a PPB again. But a temporary variation would not be sufficient to prevent PPB gains from arising.