IPTM8130 - Substitution of a qualifying policy that has run for at least ten years: whether new policy qualifies

A new policy issued in substitution for an old policy may not satisfy the qualifying policy rules when tested as a stand-alone policy because

  • the term or premium paying term of the new policy described in IPTM8040 is less than 10 years, or
  • the premium spreading tests described in IPTM8055 are not met.

However, even if this is the case, the new policy will qualify if it satisfies the ‘maximum premium test’ in ICTA88/SCH15/PARA17(2)(c)(i).

Maximum premium test

The new policy will qualify if

  • it took effect more than ten years after the date that the old policy was made, and
  • the premiums payable for any 12 month period under the new policy do not exceed the smallest premium paid for any 12 month period under the old policy, going back to when the old policy was made.

In comparing the levels of premiums on the old and new policies, any premiums of the new policy relating to a transfer of value from the old policy are not included.

Example

  • A qualifying policy was made at the beginning of year 1 with ‘low start’ premiums of £500 per year, which rose to £1,000 per year from year 3 onwards. The policy is due to mature at the end of year 20.
  • In year 12, the policy is substituted by a new policy with premiums of £1,000 per year also maturing at the end of year 20. The transfer value of the old policy applied as premium to the new policy is only a nominal £100, due to a slump in the stock market.

When the new policy is tested as a stand-alone policy, disregarding any transfer value treated as premium of the new policy, it fails the qualifying policy rules because the term is only 8 years. But it might still qualify if it passes the ‘maximum premium test’.

It passes the first leg of the maximum premium test described above because the substitution was more than 10 years after the old policy was made. But it fails the second leg of the test because the maximum premium payable under the new policy, ignoring any transfer value is £1,000 and this exceeds the smallest premium – £500 – paid under the old policy.

However, if instead the annual premium payable under the new policy were £400 then the maximum premium test would be passed and the policy would qualify.

Annual Premium limit from 6 April 2013

ICTA88/SCH15/PARAA3

With effect from 21 March 2012, the annual premium limit must also be considered when deciding whether the new policy is a qualifying policy.