Advisers say the Association of British Insurers’ plans for capital gains tax reform are unlikely to change the attractiveness of investment bonds and warn that people already in bonds may be encouraged to pull out and reinvest.
After a number of talks with the Treasury, the ABI wrote to the Chancellor last week urging him to reduce the rate of tax higher rate taxpayers would pay on investment bonds from 40 per cent to 30 per cent, stating this was a “sensible compromise”.
Both advisers and insurance providers are worried the proposed 18 per cent flat rate of capital gains tax will kill off the investment bond market, which was worth £30bn in 2006.
They say the move will create an unlevel playing field as income from insurance bonds will still be subject to income tax rates while that from other investment products like unit trusts will be subject to the 18 per cent rate.
But Informed Choice managing director Martin Bamford says: “This would not be a substantial change. There is a lot of panic around from the ABI and the adviser community that this will be the death of investment bonds and I don’t think reducing the tax to 30 per cent would change much.”
Hargreaves Lansdown head of financial practitioners Danny Cox agrees and predicts that a reduction in tax could stimulate an exodus from investment bonds.
He says: “Reducing the tax on bonds to 30 per cent just gives people a chance to get out with a lower tax charge. I think this will stimulate people to pull out and reinvest elsewhere.”