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Life offices fear capital pain tax

When the Inland Revenue issues a consultation that proposes sweeping changes of the tax regime that could result in additional taxation on savings, ears prick up. But when people see the dense and abstract document the Government issued last week on corporation tax, there is a studied silence as they try to digest the document.

The ABI has already met with the Government to protest about the impact that the proposals could have on the financial services industry.

The savings industry is still angered by the £5bn tax raid on pensions carried out by Chancellor Gordon Brown in his first Budget in 1997 and will scan any changes to the tax regime carefully.

This consultation on corporation tax was flagged by the Chancellor in the Budget and is separate from Sandler&#39s proposals for a “levelling” of the tax playing field between life and fund companies.

The fundamental reform of corporation tax proposed by the Inland Revenue will look at three areas – tax treatment of capital assets, rationalisation of the schedular system and differences in tax treatment of trading and investment companies.

It is the first, which is causing most concern as the plans could affect the life industry significantly. Life funds would be taxed annually on gains in the value of equities, land and property. This would leave policyholders facing a tax on investments whether they realise them or not rather than at present when tax is only levied when a gain realised.

The consultation acknowledges the impact that the changes could have on life companies. It says: “A treatment of gains appropriate to a company making profits only for its shareholders might be inappropriate for a life company or at least require some modification.”

It suggests a further consultation once the way forward has been agreed to see what exemptions could apply to the life industry.

The life industry will be pressing for a fuller review of tax as it affects the sector.

Norwich Union head of actuarial support Rob Kerry says: “When you look at the tax regime for individual savings, you need to take a holistic view, looking at what is paid by the investor and what is paid by the company inside the fund.”

The consultation document also says there would have to be new rules for collective investment schemes so they would continue to have exemption from CGT.

IMA tax adviser Nathan Hall says: “We will lobby to ensure that capital gains are still not taxed at fund level.”

Association of Investment trust Companies technical director Ian Sayers is not too concerned by the capital gains aspect for his sector but says investment trusts, with their legal status as companies, could benefit from the plans to put trading and investment companies on a level footing.

He says it could enable business expenses such as advertising and setting up savings schemes to be written off against tax in the same way that trading companies such as Marks & Spencer do. He adds ruefully that it might have helped with the AITC&#39s its campaign.

Technical Connection partner Tony Wickenden has identified another aspect in the consultation that could make investing through life companies less attractive.

Currently, within a life wrapper an individual can take advantage of a company&#39s ability to have corporate gains linked to inflation to mitigate their tax liabilities.

But the Revenue is looking to remove this, leaving life companies open to a double whammy of not only having the gains taxed annually but losing their indexation too.

Wickenden also ominously observes that the wording suggests that the commitment to preserve the status quo for collective investment schemes is more categorical than for the life companies.

Tax consultant Tony Wickenden will be analysing the detail of the Revenue consultation in future articles for Money Marketing

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