What is a Personal Portfolio Bond (PPB) ?
A Personal Portfolio Bond (‘PPB’) is a specialist type of life insurance policy.
Unlike traditional life assurance policies, which restrict investment of the policy premium to collective investment funds and similar assets, a Personal Portfolio Bond allows the insurance premium to be invested by the insurance company, at the request of the policyholder, into Private Assets.
What are Private Assets?
Private assets are things that would be considered ‘personal’ to the policyholder. Examples of private assets are – land and buildings, Intellectual property, and shares of an investment company incorporated in the Isle of Man or elsewhere.
Under UK law, an insurance contract which is linked to any asset except the following is considered to be a Personal Portfolio Bond:-
UK permitted assets – A linked fund, a unit trust, an investment trust, a REIT, an open ended investment company (OEIC), an authorised insurance policy or cash. See relevant section of HMRC manual here.
Tax Treatment of insurance arrangements and PPBs
In many jurisdictions, insurance arrangements are subject to their own special tax treatment and often that tax treatment is more beneficial to policyholders than making an investment in the assets directly would have been.
Sometimes the treatment permits ‘gross roll up’ or switching of underlying investments without crystalisting a tax charge and sometimes it allows withdrawals or partial withdrawals on preferential tax terms.
Of course there are often conditions which determine which insurance arrangements are afforded the beneficial tax treatment and these special rules an conditions are generally imposed on a jurisdiction by jurisdiction basis.
For example in the USA – there are complex rules in relation to the required level of life cover and the diversification of assets for a policy to be ‘qualifying’ for tax purposes. Generally PPLI and PPVA policies are designed to meet these rules.
The UK also has a special tax regime to discourage the use of PPBs. In the UK its the Personal Portfolio Bond (Tax) Regulations 1999 – which create an additional tax charge in the form of a 15% annual deemed gain for UK resident investors in insurance policies which are determined to be PPBs.
So why the interest in PPBs ?
PPBs are of interest because depending on where the client is a tax resident, there are situations where PPBs and other bespoke insurance arrangements can prove beneficial for wealth planning purposes.
Sometimes PPBs arrangements can form part of a solution where significant capital or income gains are anticipated or for cross generational multi jurisdictional planning – it all depends on the circumstances.
In certain circumstances the unique treatment of PPBs provide advantages for the client compared with holding assets directly or via an offshore trust.
We believe that personal portfolio bonds form an invaluable and much underused part of the financial planning toolkit for HNWIs and we recommend that CSPs and other advisors of HNWIs in other European jurisdictions, South Africa, the Middle East, Australia, Asia and Africa should familiarise themselves with the local rules to determine if such arrangements can assist their clients.
Personal Portfolio Bond Costs.
Fees for traditional insurance arrangements are traditionally charged on an asset based AUM fee. However, frequently private assets like private company shares are difficult to value and for this reason some PPB providers issue them on a fixed fee basis with the annual charges unrelated to asset value.
Katz & Co does not advise on or arrange insurance based investments but we can introduce qualified professionals to specialist insurance companies who provide flexible and cost effective insurance products including PPBs.