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Howling at the moon

Reports indicate insurance bond sales have fallen in the first half of this year. Some life offices have seen falls of over 50 per cent and the claim is that this devastation has been caused by the changes to capital gains tax introduced in April.

If the CGT changes are the cause, then it might follow we should be seeing a big increase in mutual fund business as investors aban-don the insurance bond in favour of an investment taxed to CGT. But IMA statistics show a downturn of 2 per cent on gross retail sales and a fall of 62 per cent on net retail sales.

The likely reality is it is economic and market cond-itions leading to reduced overall investment volumes but we hear the continuing cry that the CGT wolf has eaten all the bonds. The life industry is fuelling a self-fulfilling prophecy and doing a Ratner.

The pre-Budget report in October 2007 brought news of the changes to CGT. There were howls from life companies that the insurance bond would die unless corresponding changes were made to the taxation of life bonds.

The Government concluded for good reason there would be no change to bond taxation. The life industry told advisers that insurance bonds would be useless unless bond tax was changed. Bond tax did not change, QED, bonds must have become useless. Having predicted the demise of the insurance bond, the life industry had to turn round and deliver all those good reasons to continue using bonds. Cry wolf and people believe what you say, cry “only joking” and they may not listen again.

For basic-rate taxpayers, the CGT changes were marginally disadvantageous. For the higher-rate taxpayer, the CGT changes were favourable but only in relation to investments producing capital growth. For other assets, in particular, property and fixed interest, the insurance bond had and continues to have taxation advantages.

Whether one is likely to better than the other depends on the asset class and the taxpayer’s circumstances. Sometimes a collective looks preferable, sometimes an insurance bond.

One wrapper never did fit all. Many of the circumstances where a collective now looks advantageous over an insurance bond existed before the CGT changes. These changes did not make insurance bonds worse overnight, they were already worse in some circumstances. Bonds continue to remain tax-efficient for a number of asset classes and have some nuances that can be useful for types of tax planning.

The CGT changes have acted as a catalyst. They have not made vast changes to the way that investment return is taxed but seem to have caused advisers to consider whether a bond is always right.

We are simply witnessing the dawning realisation that bonds are not and never have been right for all investors all the time. Possibly, the insurance bond had begun to dominate the market and tax planning was beginning to be forgotten. With less than 0.5 per cent of people using their annual CGT allowance, it is surely time mutual funds took their rightful place.

Rather than crying wolf, life offices might accept that one wrapper does not fit all and begin educating advisers on where bonds have a proper place. Our research suggests that 75 per cent of advisers are not satisfied with the information provided by life companies on the topic.

Paul Kennedy is director of taxation and trusts at Fidelity FundsNetwork


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