Simon Holt may have grabbed a headline or two by talking about the potential churning bonanza open to IFAs in light of the proposed new rules on capital gains tax although I think he is over-egging the cake a bit. Consider:1: The new rules are not yet cast in stone and frantic lobbying from the life insurance industry may yet see the Treasury agree to moderate these proposals so that investment bonds for higher-rate taxpayers are not quite so disadvantaged by comparison with unit trusts.2: Bemoaning the absence of any clear definitions from the FSA as to what may constitute churning and what may not is a forlorn hope indeed. That simply is not part of the PBR gameplan and never will be. The FSA will judge each case at its discretion on its own perceived merits and if the person making the judgement happens to be in a bad mood on the day, then tough luck. You have no right of appeal. That is simply the way that the world of regulation is going.3: In many cases, (legitimately) avoiding a higher-rate tax charge on crystallised gains from life insurance investment bonds is not very difficult. Assignment of interest to a basic or zero-rate taxpayer is a very useful mechanism. Phased encashment over a number of tax years can also avoid any additional tax liability.4: Investment bonds, as life insurance products, are insulated from the clutches of the local authority in the event of the owner having to go into community care. As a non-income-producing asset, they are also much more suitable investments for trusts than unit trusts.
In practice, all that will be required to justify a recommendation to rebase an investment from the wrapper of an investment bond to a portfolio of unit trusts is a clear (written) explanation of the reasons why, along with CAR, for the work involved. Why should that be a problem for any quality IFA?
In many ways, these latest changes to the CGT rules (assuming they come to pass) should represent good news for the quality end of the IFA community and decidedly the opposite for the banks and building societies which routinely flog virtually nothing but life insurance investment bonds.
Unless all bank advisers from this point on draw the client’s attention to the fact that investment bonds, as a pure investment proposition, are, in the great majority of circumstances, fundamentally less taxefficient than unit trusts, it should be easy to identify that badly incomplete advice has been given.
The question, as always, is whether the banks adopt such new standards of advice and, if they do not, will the FSA have the resolve and integrity to take action against them on the issue?
Wait and see but don’t hold your breath.