Providers and advisers have called for greater clarity from HMRC over how relevant life plans with critical illness cover will be taxed.
Aviva has stood by its relevant life plans after communication from HMRC has thrown their tax status into doubt.
In a letter from HM Revenue & Customs to fellow relevant life provider Vitality seen by Money Marketing, HMRC confirms relevant life plans cannot cover critical illness and receive the favourable tax treatments given to relevant life plans unless the critical illness necessarily leads to retirement.
Aviva’s relevant life plans include critical illness cover. The provider maintains these will still provide tax efficient death benefits to employees, however. Under relevant life plans, benefits should not count towards the lifetime or annual pensions allowances and may be treated as a business expense by the employer.
An Aviva spokeswoman said: “Our commitment to our product has not changed at all following our previous detailed examination of the legislation, which has been confirmed by external QC opinion.
“We are confident our product remains viable and complies with the relevant legislation.”
Royal London was one of the providers to query the tax status of the critical illness provision.
Royal London product architect Ian Smart says the firm has not received any guidance from HMRC since August, and admits the situation is still not clear.
Smart says: “Providers and advisers want clarity of how their customers will be treated for tax purposes so that providers can confidently design products and advisers recommend the correct course of action for their client based on their circumstances.”
“HMRC appear to have been consistent with the answers that have been given to Legal & General, Vitality and ourselves albeit this seems to be different to the advice that Aviva has received from counsel. Advisers should therefore take into account the difference of opinion between providers so they are aware of and can point out any risks of a different tax treatment to the customer.”
Sense network does not stop its members recommending relevant life plans, it does require pre-approval for them.
Sense network compliance director John Netting says: “The concept is a useful product to have, but I am surprised Aviva are the only one offering this. Normally when a new product comes out someone else jumps on the bandwagon. That nobody else has gives you pause for thought.
“Ultimately if it doesn’t work and does fail on a claim the adviser is still to get the complaint. Even if you flag the possibility this might be challenging and might not work to a client on a sale, you are potentially pointing out the product isn’t necessarily correct when you are recommending it. My concern is that might not necessarily stand up with the Ombudsman.”
However, Red Circle Financial Planning director Darren Cooke, who has recommended a number of relevant life plans with critical illness cover, says he is confident in advising clients to take the policies based on future tax treatment.
He says: “I have done a couple with critical illness included and they seem to have gone through okay and have given tax relief. I can’t remember seeing any caveats in their from the taxman saying if you are wrong the customer’s neck is on the line.
“If it was another insurer I didn’t trust so much and didn’t have the reputation of Aviva I might be a little bit more sceptical.”
HMRC did not respond to a request for comment.
Expert view: Phil Young
Opposing views can’t both be right
This debate is of interest to advisers for three reasons, above and beyond HMRC’s decision itself.
Liability: While you would imagine Aviva would be the first door HMRC will knock on, it will not indemnify advisers for recommending this product. This is important if a critical illness claim fails to gain the exemptions promised as part of a relevant life policy. Aside from the cost of any complaints, there is the cost of revisiting clients with this policy and replacing or re-positioning it. The uncertainty has gone on too long for all concerned.
HMRC inconsistency: If we assume Aviva has had contradictory guidance from HMRC from the other providers, this raises wider concerns around HMRC judgement. Often vague, I have seen two directly contradictory statements from HMRC recently. It is important that advisers are allowed to inspect HMRC correspondence and it begs the questions should HMRC make all private guidance and correspondence publicly available for inspection? Different insurers have different approaches and risk appetites for pushing the boundaries of legislation and regulation. Some use a barrister’s opinion, some go direct to the regulator or HMRC, some do neither. Do not assume they all have the same approach.
Failure of trade bodies: Surely a large and expensive trade organisation such as the Association of British Insurers could have stepped in by now to resolve this? Unfortunately, on matters of genuine concern such as this, the industry reverts to type and defaults to bickering. This seems endemic to all trade and professional bodies – on the very issues they could really add a valuable contribution to, they run for the hills. They have the resources, is it the guts or the intellect they lack?
This particular debate at present looks like two completely opposing views, and both cannot be right.
Phil Young is managing director at Threesixty