I am not a lawyer but personally I would be a little concerned that the cash alternative puts a cash value on the points, particularly in the light of HMRC guidance:
On page 20 this refers in the section on part surrender or part assignments to “A gain on a part surrender etc. which results in a receipt of benefits or a payment of a cash bonus or on your insurer making a loan or on a sale”
Note the reference to the “receipt of benefits”
However as a non-lawyer I like legal opinions because I am entitled to rely upon them. That way even if they are wrong, it is not my fault. It would seem to me that a taxpayer is in a similar situation. If they have legal advice upon which they can be expected to rely, to the effect that there is no tax liability and no reporting requirement, and that advice is completely wrong, at least they have clearly not been dishonest in failing to report. That should limit any penalties which might apply.
In addition there is the provision for payments of 5% of the initial premium realised in any year not to be taxable until total withdrawals exceed the initial premium. If there is a tax liability it very probably will not arise for a number of years or until the policy is surrendered or sold. Given that resale values of time-shares tend to be low, maybe not even then.
Although technically this is not a timeshare, any third party purchaser is likely to view it as such when making a cash offer.
Much would depend on how much this alternative cash benefit is in relation to the initial cost of the policy.
This situation looks very complicated and the cost resolving it is likely to be disproportionate to the tax liabilities involved and if there are indeed tax liabilities the cost determining their exact amount might also be disproportionate to the amount of tax involved particularly as it might involve looking at benefits received decades earlier.
Ian McKeever & Co Consulting Actuaries