730BA Personal portfolio life policies

Summary

This section provides special rules for the taxation of the proceeds of personal portfolio life policies.

Personal portfolio life assurance policies are a type of life policy which allows investors to place personal investments within a life assurance policy. This is referred to as the “wrapping” of personal investments in a life policy and, hence, the term commonly used for these products, namely, “wrappers”. With traditional life insurance investment products the insurance company uses its professional expertise and discretion to invest funds on behalf of policyholders collectively. However, there is no element of a collective investment in these wrapper products. Essentially, such a life policy is a contrived vehicle to allow the investor to gain access to the “gross roll-up” tax regime. Briefly, this means that the income and gains accruing in respect of the assets underlying a life policy are allowed to grow – or roll-up – tax-free over the duration of the policy. Tax is only imposed when a policyholder cashes in or withdraws funds from the policy and, if applicable, 8 years after the policy commenced. When this happens the profit on the policy, that is, the accrued income and gains, is currently liable to a flat exit tax at a rate of 33 per cent for non companies. By placing selected personal assets in a personal portfolio life policy investors could limit the taxation of income and gains from those assets to a flat 33 per cent and, furthermore, could defer that tax liability until the policy was cashed in or funds were withdrawn from the policy. In addition, no liability to PRSI or levies would arise. On the other hand, if the high-income policyholder had invested directly, the tax charge on the income arising from the investment would be at the marginal rate, currently 41 per cent per annum, plus PRSI and levies.

This section provides for a definition of a “personal portfolio life policy”. Section 730F(1)(b) imposes a 20 per cent additional charge (linked to the current standard rate of income tax) on the proceeds from a personal portfolio life assurance policy. The additional charge applies on top of the current 33 per cent exit tax charge and applies to the proceeds of such policies paid out by life assurance companies on or after 26 September 2001.

In this section, a personal portfolio life policy is defined, in broad terms, as a policy which allows the policyholder to select, or to influence the selection of, the assets which determine the policy benefits. However, a policy will not be regarded as being a personal portfolio policy where the only property which may be selected is property consisting of units in a unit trust and similar undertakings; property allocated by the assurance company to an internal fund so as to fund policy benefits; cash; or a combination of these.

These exceptions only apply provided the opportunity to select the property concerned is widely available to the public at the time the property is actually available for selection by the policyholder. This wide availability must be evidenced in published marketing or promotional material published by the assurance company.

To ensure that the exceptions cannot be exploited – and the additional charge avoided – some additional requirements apply to policies commenced or marketed from 5 December 2001. These additional requirements are that —

• the assurance company must deal with everyone interested in selecting the property on a non-discriminatory basis, and
• where the property to be selected is primarily land and buildings and the assurance company is seeking to raise a pre-determined amount in investments, each investment made by a policyholder will be limited to 1 per cent of the amount being sought by the assurance company.

Details

Definitions

(1) The definitions of “internal linked fund” and “linked asset” are connected and are intended to identify the asset or assets (be it an actual cash fund, a portfolio of equities or commercial paper or real property) the assurance company allocates in its books as the property which will determine the level of benefits to be paid out on the policy on maturity or encashment.

The definition of “land” is intended to include any buildings on the land. It is also intended that this should include land and buildings situated both in the State and elsewhere. Expressly included within the meaning of land is any interest in land. This is intended to be as wide as possible so as to minimise any possibility of persons circumventing the reference to land by means of lease holdings, licences, or anything else. Also, expressly included is the holding of land indirectly through a company except where the company is a quoted company.

The definition of “public” is intended to be flexible enough so that a distinction can be made between policies which are designed specifically for the corporate sector and those designed for individuals. The term is used in subsections (5) and (6) to require that the marketing of a particular life product is directed at the public generally rather than a pre-selected group of persons.

Meaning of Personal Portfolio Life Policies

(2) A “personal portfolio life policy” is defined for the purposes of both this Chapter (which applies to such life policies written by domestic life assurance companies) and Chapter 6 (which applies to such life policies written by assurance companies established in other EU countries, in another State which is a contracting party to the Agreement on the European Economic Area and a State which is a member of the OECD and which has a tax treaty with Ireland) of this Part.

A life policy is a personal portfolio life policy where —

• the benefits under the policy derive from either the value of or income from property or by virtue of fluctuations in the value of property or in an index, and
• the property or index concerned was or can be selected by, or the selection of the property or index concerned was or can be influenced by, certain specified persons.

These persons include the policyholder, an agent of the policyholder, a person connected with either of these two persons, or the policyholder and a connected person or an agent acting for both the policyholder and the connected person. Whether or not a person is considered connected with another person is to be determined in accordance with the rules of section 10.

The general rule as to what constitutes a personal portfolio life policy is subject to certain exceptions to the rule – see below. It is to be noted that where the assurance company retains complete discretion over the property selected to provide the benefits under the policy, then the policy would not be a personal portfolio policy.

Deemed selection by the policyholder

(3) The selection, by the policyholder or a person connected with the policyholder, of the property underpinning the benefits to be delivered by the life policy is an integral feature of a personal portfolio life policy. To counter an attempt to cloak what in substance is the exercise of the power to select by the policyholder etc. in a form which apparently confers the power of selection to some other unconnected person, the terms of the policy are treated as allowing selection by the policyholder etc. in certain specified circumstances whereas a strict analysis of the policy terms might not give such a result. These rules also apply where any such agreement, rather than forming part of the policy terms, is implemented in some other fashion. The reference to an “investment advisor no matter how described” is deliberately left undefined so as to allow the term to take on as wide a meaning as possible. The intention is to catch anyone who is given the authority to select or advise on the selection of the assets which are to determine the policy benefits.

Exceptions

(4) Certain life policies which might otherwise be personal portfolio life policies are not to be treated as such where certain conditions are met. This treatment applies where the property to be selected is of a particular type. The type of property concerned is property—

• which an assurance company has allocated to an internal fund and which, therefore, forms the basis on which the benefits under the policy will arise,
• units in an investment undertaking,
• cash (other than cash used for currency speculation), or
• a combination of these classes of property.

In addition, the property selected must satisfy the condition in relation to the selection of the property. A life policy which provides for the benefits under the policy to be determined by reference to an index may also receive this treatment where the index is an index which satisfies the condition in relation to the selection of the index.

As respects a life policy commenced on or after 5 December 2001, further requirements apply before such a policy will not be treated as a personal portfolio life policy. These requirements relate to the terms under which the policy is offered and are set out below.

Condition in relation to selection of property

(5) The condition which property must comply with in order for the policy not to be treated as a personal portfolio life policy is that, at the time the property is or was available for selection (the test will not apply at any other time), the chance to select the property must or must have been made available to the public generally. The definition of the term “public” makes it clear that this can include policies which have been specifically devised for particular groups, for example, individuals only, companies only or a combination of these groups. Making the opportunity available generally to the public has to be evidenced by marketing or other promotional literature published at the time the opportunity to select the property is made available. A distinction is made between land and other property in relation to the ability to select.

In the case of land, the actual property available for selection must be made available generally for selection by the public at the time the selection is being made (that is, everyone interested must have the chance to select the same property as the basis for determining the benefits under the policy).

In the case of other property, it is sufficient that property of the same description be available for selection generally at the time the selection is being made (for example, a portfolio of shares will require that the opportunity to select a portfolio of shares of the exact same companies be available generally to the public at the time the portfolio is being selected).

Condition in relation to selection of indices

(6) The condition which an index must satisfy if a policy is not to be a personal portfolio policy is that the opportunity to select the index must be or have been made available to the public generally at the time the index is or was available for selection. The same considerations as to what might constitute the public in any given case and the need to evidence the marketing or other promotional literature apply here as in relation to the selection of property. The index concerned is the consumer price index or a similar index complied in another State or any published index of share prices on a recognised stock exchange. For this purpose, a recognised stock exchange is the Irish Stock Exchange or a stock exchange in another country which had the same level of recognition in that country as the Irish Stock Exchange has in Ireland. A combination of such indices is allowable.

Additional requirement for post-6 December 2001 policies

(7) Additional requirements must be complied with by life policies commenced on or after 6 December 2001 if such policies are not to be regarded as personal portfolio life policies. These requirements do not apply to life policies which are based on a purely cash fund or policies where the marketing material was published in advance of 6 December 2001. The requirements are that —

• the offer be made on a non-discriminatory basis,
• where the offer involves the selection of property which is primarily land/buildings (more than 50 per cent) and the assurance company has indicated in its marketing material the amount of money it is seeking from investors, the offer must limit the amount that any one investor may invest to 1 per cent of the amount capital requirement set out by the assurance company (exclusive of any borrowings).

Relevant Date: Finance Act 2021