CGT hike set to spark insurance bond comeback

21 June 2010 0:00 am | Updated: 21 June 2010 10:18 am | By Helen Pow

The product has suffered a drop-off in sales over the past two years after the Labour government introduced a flat rate of 18 per cent CGT in its 2008 Budget which led to mutual funds becoming a more attractive investment opportunity for many investors.

The Government has already outlined that CGT will increase to match income tax although it has not stipulated whether the maximum tax rate will be 40 per cent or 50 per cent. There could also be a cut in the annual exemption, currently £10,100. It is unclear if any measures, such as tapering relief, will be introduced to protect savers.

Insight analyst for wealth management David Abbis says: “Insurance bonds have suffered in the last two years. Changes to CGT, which are expected to include an increase in the current rate and a reduction in the exemption threshold, could prompt significant outflows from mutual funds into insurance bonds.

“Insurance bonds are life policies so the underlying funds are subject to different taxation rules than a direct investment into shares or unit trusts. For example, withdrawals of up to 5 per cent of the original capital amount are permitted each year without incurring any tax liability.”

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