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Loss on gains

Continuing my theme of last week in looking at likely tax anti-avoidance measures by the Government, the introduction of a general anti-avoidance rule together with clear- ance procedures may well impact heavily on many financial services product providers looking to develop and innovate new products and product packages.

It may well be that the market will not accept a package as effective until it bears an Inland Revenue stamp of approval in the shape of a clearance.

It may, however, be that clearances are not possible for schemes to be generally marketed but only in respect of individual transactions. We shall have to wait and see.

Currently, there are enough other proposals for specific anti-avoidance provisions for the financial services industry to be concerned about. There are the provisions aimed at preventing the disapproval of pension schemes combined with their export and removal of funds free of tax.

There are also the specific provisions on offshore trusts, as well as the provisions aimed at arrangements to provide for the tax-effective repatriation of capital from off- shore trusts that were announced before the Budget.

There are also provisions to hit personalised bonds. That provisions attacking personal bonds would be introduced was alluded to in the consultative document and draft legislation on life policyholder taxation.

Action has now been taken. The Inland Revenue has made it clear that these new provisions will operate to attribute deemed gains of 15 per cent a year to the policyholder.

The point that the Inland Revenue seems to be making here with this proposed new legislation is that philosophically it believes that the personal bond is not the sort of insurance product that should qualify for the simple tax system applying to life policies generally.

It would seem that the ability effectively to manage a portfolio of investments within the tax-protective shell of a life policy is what the Inland Revenue wants to prevent.

It appears to believe (and it has stated as much in the past) that the system for taxing life policy gains should only be available to policies that are not merely wrappers for personal portfolios but which represent genuinely pooled or collective investments.

The point seems to be why should what, in reality, is a portfolio management service qualify for the favourable tax-deferring provisions available to pooled funds?

It cannot, however, be denied that, under current law, regardless of the underlying investments, such personalised policies are, nevertheless, policies of insurance.

The provisions attributing a deemed gain of 15 per cent of the total premiums paid up to the end of each policy year and the total of deemed gains from previous years to UK and offshore personalised bonds is the method that the Inland Revenue has chosen to attack them rather than attempt a much more complex attack founded on recategorising such policies as other than policies of life insurance.

A key factor in the new legislation will be the definition of what an offensive personal bond is. This is, we understand, to be dealt with in secondary legislation.

This will enable the definition to be changed quickly if necessary so as to deal with any "unacceptable innovations".

It is, however, to be hoped that policies offering the choice of pooled funds – not necessarily offered exclusively by the insurer – from a published menu of such funds will be acceptable.


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