View more on these topics

Beyond redemption

When considering the marketplace for advice on capital investment, most attention is, understandably, given to individuals but not just any individuals, only those who value and can pay for advice – and there is much advice that is needed.

The choices available are significant and not easy for the non-specialist to make.

The trouble is that many of those who are inclined to go it alone may not be aware of the choices that exist and even less aware of the consequences of those choices.

This is clearly evident not only when it comes to determining the underlying investment portfolio but also when it comes to choosing the outer wrapper – if there is to be one – for the investment. Making the wrong choices can be costly.

This conclusion also holds good for other than individuals – that is, trustees and companies.

Trustees of discretionary and accumulation and maintenance trusts have recently become higher-rate taxpayers courtesy of the new rate applicable to trusts.

Corporate investors have to give serious thought to the most appropriate outer wrapper for their capital investment in the light of the recent ann-ouncements on capital redemption bonds (CRBs) effected by companies.

These CRBs will have been typically underwritten by non-UK-resident insurers and many advisers and clients will have considered them as quasi offshore investment bonds for which no lives assured were needed.

Well, the latest onslaught from the Inland Revenue makes it clear that this was far from its view, regardless of what the underlying investments were.

Its recent interest was prompted by arrangements marketed to enable corporate investors in CRBs to create capital losses for corporation tax purposes.

This would not be possible if the CRB were treated as being within the loan relationship rules as it would then be a qualifying corporate bond and could then give rise to neither a chargeable gain nor allowable loss.

In its explanatory note of March 3, the Inland Revenue stated that CRBs are a form of investment or deposit which is offered by an insurance company. They are not life insurance policies as they contain no element of contingency on human life. But they are deemed to be insurance for regulatory purposes, in order that an insurance company, which is not permitted by the rules made by the Financial Services Authority and EC Insur-ance Directives to carry on business which is not insurance business, may write such business.

It has become clear as a result of disclosures made to the Inland Revenue under part 7 Finance Act 2004 and otherwise that corporate-held CRBs are being used to manufacture an alleged artificial allowable loss for the purposes of corporation tax on chargeable gains.

The creation of the loss depends crucially on the proposition that a CRB is not exempt from tax under the Taxation of Chargeable Gains Act (TCGA) 1992 and on the interaction of the TCGA and the chargeable-event rules.

The Inland Revenue does not accept that these stratagems succeed in their object but, in order to bring clarity and finality to the issue, CRBs will be taken outside the chargeable-event rules and the provisions of the TCGA 1992.

The Inland Revenue has produced draft legislation in the shape of a clause which amends para 1A sch9 Finance Act 1996.

Paragraph 1A previously provided that the loan relationship rules do not apply to life insurance policies or capital redemption policies so as to keep such polices within the chargeable-event legislation. This provision is now amended to exclude capital redemption policies.

What does this mean in practice? I will look at the implications and go into further detail in my article next week.

Recommended

Halifax calls for increases to IHT threshold

Halifax is calling for increases to the inheritance tax threshold of 263,000, following research finding that 108 constituencies have one in four property transactions beyond the threshold.

Selestia Launches Online Distribution Channel

Selestia has launched an online distribution channel with telephone support to provide alternative access to the Selestia platform for IFAs.Selestia hopes to use Adviser Direct as a means to raise its brand awareness among the wider IFA community. While it remains committed to distribution through regional sales managers, Selestia hopes to appeal to IFAs who […]

Zero rate stamp duty threshold raised to 120,000 in today’s budget

The Chancellor has doubled the zero-rate stamp duty threshold to 120,000 from 60,000 from midnight tonight.This is the first rise since 1993 when the average house price was 64,000 according to the Council of Mortgage Lenders.There is no change to the charge on residential transactions where the consideration exceeds 120,000. There is no change to […]

Auto-enrolment: tips for employers

The Pensions Regulator (TPR) has released advice on communications for employers, including three tips to help you with your auto-enrolment duties. 1. Allow enough time to select your pension schemeIt’s recommended that you start to prepare for auto-enrolment at least 12 months in advance of your staging date; additionally, give yourself time to choose the […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment