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

A bond can become a personal portfolio bond (PPB) when the policyholder's asset-selection rights fall outside the permitted-property rules. A deemed gain under the statutory 15% formula is then taxed in each insurance year other than the final one. The formula adds the excesses for earlier years 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, subject also to the statutory selection conditions. Categories include qualifying collective funds, investment trusts, insurer internal funds and cash; a wide choice of ordinary listed company shares does not by itself qualify (IPTM3640, IPTM7735). Special rules for certain pre-17 March 1998 policies must be checked separately (IPTM7795). Permission to choose investments therefore needs both tests, not just a broad menu of assets.

Once caught, ITTOIA 2005 ss.522–524 (IPTM3650) deems a gain of 15% of total premiums paid, plus the excesses for earlier years (each worked as if that year were a personal portfolio bond year), 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 excess 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applied (self-checking arithmetic, not a pinned HMRC example): a £200,000 single-premium bond that is a PPB, nothing withdrawn.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. A bond whose terms let the policyholder (or a connected person or adviser acting for them) select assets outside the permitted categories — specific listed shares, say — is a PPB whatever is actually held, and the annual charge switches on. The fix is in the policy terms: restrict selection to permitted property (internal funds, authorised collectives, investment trusts, cash and the like) that also meets the general or class selection condition (ITTOIA 2005 ss.516–521; IPTM7710). 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 part-surrender excess gains that a PPB's formula deducts are explained in the 5% allowance trap.

ITTOIA 2005 ss.515–526 (PPB regime ; s.516 selection terms ; ss.522–524 the computation) · IPTM3600 · IPTM3650 · IPTM7710 (the policy terms decide)