Sales of life insurance policies could be crippled following the Budget's revamp of the capital gains tax regime which now favours unit trusts.
The Chancellor is making a major reform of the capital gains system in a bid to change the tendency toward short-term investments by rewarding long-term investments.
The change will hit many life policies, including endowments and single-premium bonds.
The Budget unveiled a tapered system of CGT for personal investments such as unit trusts when they are cashed in. The tapering will depend on the period that the asset is held and whether the investor is a higher- or basic-rate taxpayer.
For a higher-rate taxpayer, CGT will be payable at a maximum of 40 per cent if assets are held for less than a year, on a sliding scale to a minimum of 24 per cent for assets held over 10 years. For a lower-rate taxpayer, assets will be charged at between 23 per cent and 13.8 per cent.
But the system for life funds remains the same. There is no tapering system and 23 per cent tax is paid on gains within the life fund plus 17 per cent if the policyholder is a higher-rate taxpayer. This means that they pay 40 per cent tax, giving non-life products held for longer than a year an advantage. A unit trust held for 10 years could receive a tax break which is 16 percentage points higher than a single-prem ium bond.
Coopers & Lybrand tax partner Derek Jenkins says: "At the moment, life funds are at a disadvantage. If the Government regards life insurance as a good thing, there will have to be changes."
Norwich Union taxation manager David Rose says: "I certainly hope that the Government will bring back the level playing field for life policies. We need to look very carefully at this."
But Autif tax adviser Chris Brealey says: "The benefits will crystallise on disposal of the assets. Obviously, this has to be of benefit to the unit-trust industry."