IPTM8430 - Friendly society tax exempt policies: qualifying policy rules: other conditions affecting premium payments

Regular premiums of equal or rateable amounts (ICTA88/SCH15/PARA3(2)(b))

A tax exempt policy will only qualify if premiums are payable at regular intervals annually or more frequently throughout the premium paying term. There is a limited exception where commutation or waiver of the premiums is allowed – see below.

Normally, where premium paying intervals are constant, the premiums payable must be of equal amounts. No fluctuation of premiums is allowed. The exception is where premiums were increased to the new tax exempt limit by variation of the policy following increases in the premium limits in 1991 and 1995 - see IPTM8445.

If, however, the premium paying intervals vary then the premiums payable must be of ‘rateable’ amounts, meaning that the amounts payable must be at a constant rate proportionate to the premium interval. For example, premiums of £20 per month equate to £240 per year. If the payment frequency is changed to quarterly then the amounts payable would need to be £60 per quarter to maintain the constant annual rate.

However, in applying this test, any premium loading or discount introduced purely to reflect the change of payment frequency may be disregarded. For instance, a friendly society might impose a small loading where a policyholder switches from annual payment ina single sum to monthly payments.

Commutation of premiums (ICTA88/SCH15/PARA3(4))

A policyholder is permitted to commute the premiums, that is, to pay a lump sum in place of all remaining premiums, if:

• the policy has run for at least half the term or ten years if that is earlier, or
• the person liable to pay the premiums emigrates from the UK or gives proof of intention to emigrate.

Waiver of premiums on disability

If premiums are waived in the case of a person’s disability under the terms of the policy then that will not cause the policy to be disqualified, even though regular premiums have ceased.