The year a policy pays for its charges
The same capital held directly and inside a non-UK policy, on encashment, on death or held, with your charges, your UK tax position and inheritance tax applied alike to both.
By Eldar Edmond Grady, CEO, PPLI.com · Research checked 23 September 2026
Deferral against charges and a heavier exit rate
The direct portfolio pays savings, dividend and capital gains tax as it goes. The policy pays none of that along the way, but it carries its charges every year and income tax on the whole gain at the end.
Break-even is the first year from which the policy stays ahead to the end of the horizon. A lead that later reverses is reported as a temporary lead, not a break-even. Where the policy never catches up, the instrument says so.
The personal portfolio bond box replaces deferral with the 15% deemed annual gain. Leave it unticked only for a policy holding permitted property or run by an insurer-appointed manager you do not direct.
Three cases, £1,000,000, no charges
Set out in full so the arithmetic can be followed.
Policy 1,000,000 x 1.05^10 = £1,628,895
Direct 1,000,000 x 1.0275^10 = £1,311,651 break-even in year 1Direct 2,158,925 − 40% x (2,158,925 − 325,000) = £1,425,355
Policy 2,158,925 − 45% x 1,158,925 = 1,637,409
1,637,409 − 40% x (1,637,409 − 325,000) = £1,112,4451,000,000 − 45% x 150,000 − 45% x 172,500 = £854,875 (no deemed gain in the final year)On death the direct portfolio escapes CGT entirely, so in the second case the policy ends £312,910 behind before any charge. On leaving the UK, the deferral is kept and the exit tax falls away, unless you come back within 5 years and meet the temporary non-residence conditions.
What the comparison applies
Policy leg
Charges on the value at the start of each year: running charge, life cover charge growing at the rate you set, fixed administration; one-off costs and any charge on the premium at the start. Withdrawals within the cumulative 5% a year allowance (5% of each premium for each insurance year, cumulative, up to 100% over 20 years; ITTOIA 2005 s.507) are not taxed when taken and are counted in the final gain; anything above the cumulative allowance is a chargeable event gain at the end of that insurance year, taxed as savings income.
Exit
Encashment: policy gain at the exit rate you set (default the marginal rate, lower after top-slicing), direct gains at 24%. Death: policy gain at the exit rate, direct portfolio no CGT, IHT alike on both. Hold: nothing realised.
Your charges
Charges for bespoke policies are usually quoted individually. The 0.80% running charge is a placeholder; every other charge opens at zero, and the instrument warns while they stay there.
Common questions
What exit rate should I use?
Your marginal rate is the default. If top-slicing relief applies, your adviser can calculate the average rate on the gain; trustees and personal representatives do not get the relief.
Does the policy change inheritance tax?
Held personally, no. The instrument applies the same rate and allowance to both sides on death.
Why does a personal portfolio bond so rarely break even?
Because the deemed gain is taxed every year at the full savings rate with no top-slicing, whatever the investments earned. The instrument shows the result on your own figures.
Instruments and related reading
Tax drag calculatorThe annual tax cost, asset class by asset classOpen →Liquidity event plannerFrom gross proceeds to capital that compoundsOpen →Structure intelligenceWhen policy charges are smaller than the tax deferredOpen →Chargeable event gains and top-slicing reliefHow the final gain is calculated and taxedOpen →The personal portfolio bond rulesWhat a UK-workable policy may holdOpen →Inheritance tax and successionWhat a policy does and does not change on deathOpen →PPLI.com is not authorised by the Financial Conduct Authority and does not give personal advice. This is general information about UK law, not an invitation or inducement to enter into any insurance or investment contract. Policies issued by insurers outside the UK are not protected by the Financial Services Compensation Scheme (unless written through a UK branch).
The authorities this page relies on
ITTOIA 2005 Part 4 Chapter 9, chargeable events
Gains on life policies are taxed only when a chargeable event happens: surrender, part surrender above the 5% allowance, assignment for value, maturity or the death that ends the policy (s.484). The individual who owns the policy and is UK resident in the year of the gain is liable (s.465). legislation.gov.uk, s.484
ITA 2007 s.18(4)
Chargeable event gains are savings income for an individual, so they sit in the savings bands and are taxed at 20, 40 or 45% in 2026/27. legislation.gov.uk, ITA s.18
HMRC helpsheet HS321
Gains on foreign life insurance policies do not carry the non-repayable basic-rate credit that UK policies carry, so the whole gain is taxed at the holder's rate. gov.uk, HS321
Top-slicing relief, ss.535 to 537 and IPTM3820
The gain is divided by N, the number of complete years, to find a slice, and relief is worked out from the tax on that slice as the top of income, so a large one-off gain need not be taxed as if it all fell in the highest band. It is available only to individuals, not to trustees, personal representatives or companies. gov.uk, IPTM3820
Personal portfolio bonds, ITTOIA ss.516, 520 and 522
A policy is a personal portfolio bond if the holder, a connected person or someone acting for them can select the assets outside the permitted categories in s.520. At the end of each insurance year except the last, a deemed gain of 15% of premiums plus earlier deemed gains is taxed, with no top-slicing relief. legislation.gov.uk, s.522
HMRC helpsheet HS282
There is no capital gains tax charge when someone dies. The personal representatives take the assets at their market value on the date of death. gov.uk, HS282
IPTM3515, the gain on death
Where death ends the policy, the gain is measured on the surrender value immediately before death, so the life cover element is left out of the gain. gov.uk, IPTM3515
Inheritance tax, IHTA 1984
Nil-rate band £325,000, frozen to 5 April 2031. Rate 40%, or 36% where 10% or more of the net estate goes to charity (s.7 and Sch 1A). A policy held personally is in the estate like the portfolio would be. gov.uk, inheritance tax
IPTM3734, leaving and arriving
A gain arising while the individual is not UK resident is not UK-taxable unless the temporary non-residence rules apply (away 5 years or less, after UK residence in 4 of the previous 7 tax years). For a new arrival the gain is reduced by time-apportionment relief for foreign days (s.528). gov.uk, IPTM3734
Notice IPT1 para 2.3
Insurance Premium Tax does not apply to life insurance. gov.uk, Notice IPT1
ITTOIA s.507, the 5% allowance
Part surrenders of up to 5% of each premium a year, cumulatively, do not create a gain at the time. They are deferred, not tax-free, and count in the final gain. legislation.gov.uk, s.507
Talk the numbers through with a specialist
If the policy only just breaks even on your figures, a specialist can go through the charges with you, in writing and usually within one working day.
Ask about PPLI
Editorial standards