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Liabilities feared in Revenue income bond raid

Life offices fear an Inland Revenue review of high-income bond taxation

could leave them facing massive liabilities.

The Revenue is considering taxing life offices which offer

derivatives-backed high-income bonds on an income tax basis rather than on

a capital gains tax basis. The life offices could be hit with a huge income

tax bill.

In its Treasury return last year, Eurolife was moved to say: “Should the

Inland Revenue&#39s view eventually prevail, substantial liabilities may

result.” The life office will not put a figure on the potential

liabilities.

Eurolife has sold around £400m of the bonds in the last five years,

many of which are due to mature next year. The London-based life office

said it intended to resist the Inland Revenue&#39s view vigorously.

Industry analyst Ned Cazalet says Eurolife has “very low free assets” of

£163,000 because it is not a with-profits company but free assets are

required to cover liabilities. Eurolife also has a pension review liability

which totalled £4.2m in mid-1999.

The industry and the Revenue are waiting for the results of test cases

going through the courts before a decision is made.

Life offices and banks offering high-income bonds include Citibank, Canada

Life, Scottish Life International, AIG and GE Financial, Scottish Mutual

and Scottish Widows.

Eurolife managing director David Wootton says: “This is an industrywide

thing. Income tax would result in a higher tax liability but nobody has

been assessed yet. It is likely that there will be changes to the law in

the end.”

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