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Double tax shock for with-profits

With-profits policyholders face a double tax whammy on their savings with Chancellor Gordon Brown planning changes to how life funds are taxed.

In his pre-Budget report, Brown has proposed applying shareholder tax
rates to policyholders’ funds, which Norwich Union says will triple
the taxation of with-profits surpluses.

NU Life chief executive Gary Withers says this will cost the firm’s
policyholders around £150m and will potentially reduce long-term
returns through limiting the funds’ freedom to invest in equities by
eroding the surplus.

Withers says: “It is not closing a loophole. It is essentially a
policyholder tax and we are disappointed that, after three working
days’ consultation, it goes into statute.”

A second tax rise will also diminish the embedded value of the
non-profit part of life funds from 2005.

Legal & General believes that this second tax change will cost it
up to £300m in loss of embedded value.

Life office consultant Ned Cazalet says the plans, which were
proposed under the aegis of closing tax loopholes, are a result of
life funds paying negative taxation over the past three years. He
believes the Government feels short-changed after life funds received
an aggregate tax rebate of £12m for the 2001-03 period because
of the losses incurred in the bear market.

The ABI is to lobby the Government over the tax increases, which it
says fly in the face of treating with-profits policyholders fairly.
The complexity of both the current and proposed tax regimes means
that many providers are unclear on the possible impact, depending on
the policy mixes within life funds.

Prudential and Friends Provident do not foresee any material impact
on their funds.

ABI director of financial regulation and taxation Peter Vipond says:
“This tax hike will hit pension funds and many endowment policies
and is unfair. The Inalnd Revenue should not, as a matter of
principle, try to sneak through a significant tax increase by order
rather than through primary legislation.”

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