When a policy's charges are smaller than the tax it defers
The same portfolio held directly and inside a non-UK policy, year by year, on encashment or on death, for an additional or higher-rate taxpayer, a family leaving the UK or a new arrival.
By Eldar Edmond Grady, CEO, PPLI.com · Research checked 23 September 2026
A policy swaps one tax bill for another
Inside a policy nothing is taxed from year to year, so the whole return compounds. The cost is the charges, and a final gain taxed as income at the holder's rate instead of capital gains tax at 24%.
That exchange favours the policy when the direct portfolio would pay a lot of tax each year (interest, high turnover), when the horizon is long, when the money comes out after the family has left the UK, or when top-slicing relief brings the exit rate down.
It favours holding directly when the return is mostly unrealised growth, when the holding runs to death (no CGT on death for the direct portfolio, while the policy gain is taxed), and whenever the policy would be a personal portfolio bond.
Three cases the instrument reproduces
£1,000,000, no policy charges, additional rate unless stated. Hypothetical and exact.
Policy 1,000,000 x 1.05^10 = £1,628,895
Direct 1,000,000 x 1.0275^10 = £1,311,651
Break-even year 1Direct 2,158,925, no CGT; less 40% x (2,158,925 − 325,000) = £1,425,355
Policy 2,158,925 − 45% x 1,158,925 = 1,637,409; less IHT = £1,112,445Year 1 deemed gain 15% x 1,000,000 = 150,000 tax 67,500
Year 2 deemed gain 15% x 1,150,000 = 172,500 tax 77,625
Value on encashment 1,000,000 − 67,500 − 77,625 = £854,875The first case shows the policy at its best and the second shows holding directly at its best. The third is the reason a self-selected portfolio does not work for a UK resident at all.
What the structure comparison applies
Encashment
The policy gain (value plus withdrawals less premium) is taxed at the exit rate you set; the direct portfolio's remaining gains at 24%.
Death
Death that ends the policy is a chargeable event (s.484), measured on the surrender value immediately before death (IPTM3515). The direct portfolio pays no CGT (HS282). Inheritance tax at 40% above £325,000 is applied to both.
Charges
1% on the premium, £50,000 set-up, £10,000 a year administration and a running charge you choose. They are placeholders: charges for bespoke policies are usually quoted individually. Insurance Premium Tax does not apply.
Common questions
Does the policy reduce inheritance tax?
Not when held personally: it is in the estate just as the portfolio would be. Any inheritance tax saving comes from trusts and gifts, which this instrument does not model.
What if top-slicing relief applies?
Enter the average rate your adviser calculates as the policy exit rate on the break-even page. The compact instrument uses the marginal rate.
Instruments and related reading
Offshore bond break-evenThe year a policy pays for its charges, if it doesOpen →Liquidity event plannerFrom gross proceeds to capital that compoundsOpen →The personal portfolio bond rulesWhat a UK-workable policy may holdOpen →Chargeable event gains and top-slicing reliefHow the final gain is calculated and taxedOpen →Inheritance tax and successionWhat a policy does and does not change on deathOpen →JurisdictionsWhere a policy is issued, and the protection behind itOpen →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
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
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
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
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
Test your own case with a specialist
Send the case you want tested and we will reply in writing, usually within one working day.
Ask about PPLI
Editorial standards