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Huge call for advice expected as revenue shuts capital redemption bond loophole

The Inland Revenue has closed a tax avoidance loophole which could have major implications for firms holding capital red-emption bonds.

Corporate policyholders of these bonds will no longer be able to defer taxation on their interest-producing investments under the loan relationship rules which allowed them deferral of tax payment.

On February 10, capital redemption wrappers lost their benefit of tax deferral and are now liable for corporate tax charges annually. Tax was previously paid on gains when the bond was redeemed. All corporate holders of capital gains redemption bonds will be affected, not just those deliberately involved in artificial capital loss creation or tax avoidance schemes.

The Revenue says the changes will protect revenue for public services and ensure an unfair burden does not fall on taxpayers.

There is expected to be a demand for independent advice by corporate policyholders to determine whe-ther they should surrender a bond, accept a tax charge or switch to a multi-life policy and still benefit from the tax deferment.

Scottish Equitable International technical manager Margaret Jago says: “Are we going to be encouraging people to switch? I think we probably will. IFAs will need to determine why their clients set up the bonds in the first place. There will be a huge call for advice.”

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