The personal portfolio bond charge: the annual 15% deemed gain

A bond becomes a personal portfolio bond (PPB) when the policyholder can hand-pick the underlying assets. A deemed gain under the statutory 15% formula is then taxed in each insurance year other than the final one. The formula adds cumulative prior PPB gains and subtracts aggregate earlier part-surrender gains. No top-slicing relief applies.

The rule

A policy is a PPB if its benefits can be determined by reference to assets the policyholder, or a connected person, can select — other than the categories of permitted property (broadly: collective investment schemes, funds internal to the insurer, cash, and shares/securities chosen from a sufficiently wide range), set out in ITTOIA 2005 ss.516–520 (IPTM3600). Pick specific shares or bespoke assets and the bond is caught.

Once caught, ITTOIA 2005 ss.522–524 (IPTM3650) deems a gain of 15% of total premiums paid, plus cumulative prior PPB gains, less aggregate gains from earlier part surrenders. It arises on the last day of each insurance year other than the final year — a “personal portfolio bond event”. With no part-surrender gains to subtract, each year's PPB gain is added to the base for the next and the charge compounds. Unlike an ordinary bond gain, no top-slicing relief is available on these annual gains.

A worked example

The statutory 15% formula applied (self-checking arithmetic, not a pinned HMRC example): a £200,000 single-premium bond that is a PPB, nothing withdrawn.

These are the statutory annual PPB deemed-gain figures; no time-apportioned reduction is calculated or applied to them here. Three years in, more than £100,000 of deemed gains have been taxed — on a bond that may have paid out nothing — and the charge keeps compounding. There is no top-slicing relief to spread any of it. If an earlier part surrender produced a gain, its aggregate amount would be deducted in the later PPB formula; the no-withdrawal example has nothing to deduct.

The common error

The error is structural. Holding personally-chosen assets — a portfolio of specific shares, say — inside an offshore bond turns an ordinary wrapper into a PPB and switches on the annual charge. The fix is the permitted-property line: keep the underlying holdings within the allowed categories (collectives and the like). Whether a bond is a PPB matters because the 15% annual charge falls outside the ordinary chargeable-event rules — and, unlike an ordinary bond gain, it does not qualify for top-slicing relief.

For a bond that is not a PPB, the ordinary machinery applies instead: the gain on a surrender, maturity or death is built on the chargeable event gain calculator, and the relief that spreads it across the policy term on the top-slicing relief calculator. The events that put a bond into that ordinary regime in the first place are set out in what is a chargeable event gain, and the withdrawal allowance that a PPB's formula deducts against is in the 5% allowance trap.

ITTOIA 2005 ss.515–526 (PPB regime ; ss.522–524 the computation) · IPTM3600 · IPTM3650