LIFE POLICYHOLDER TAXATION
In any Budget there are some proposals that are directly relevant to financial services, some that are indirectly relevant and some that are just irrelevant.
Inland Revenue Budget Press Release BN25 related to life insurance companies which in our books puts it in the "directly relevant" category.
And there is one part of it (para 11) that is of particular importance, namely the reduction of the rate of tax on the policyholders' share of income and gains arising to the fund to the "lower rate" of tax. Our conversations with the Inland Revenue on the "morning after" (so to speak) have confirmed that, for this purpose, the Inland Revenue mean 20% – at the current time – and not any other rate.
It is this rate that policyholders will be treated as having paid when determining if and, if so to what extent, gains made on or after 6 April 2004 are assessed to tax.
The Inland Revenue have also confirmed that this reduction (from 22% to 20%) will not mean that basic rate taxpayers will have a liability to tax on gains; gains made by basic rate taxpayers will continue to be free of tax provided (presumably after top-slicing relief) they do not take the taxpayer over the higher rate tax threshold.
Higher rate taxpayers will continue to be assessed on any policy gains but at a rate of 20% (ie 40% – 20%) as opposed to 18% currently.
It is thought that, given that most life companies' effective average rate of tax is probably 20% or less in any event, the overall effect of this reduced policyholder credit is likely to be (possibly only slightly!) detrimental to the higher rate taxpayer – each case will clearly depend on its own facts.
UK trustees will pay tax on gains at 14% (34% – 20%) instead of 12%.
It's worth remembering that in taxing chargeable event gains on UK companies they are entitled to no credit in respect of life company tax on funds. Thus, although this latest proposal will not worsen their tax position, investment in UK life assurance bonds by UK companies should not, at least on tax grounds, be made.
Finally, the Inland Revenue have confirmed that the whole of all policy gains realised on or after 6 April 2004 will be taxed as set out above regardless of when the policy was effected. In other words, there will be no apportionment of the gain between different periods to reflect different rates of life company tax.