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Overview

Financial advisers who use single premium bonds as part of the investment or tax planning solutions they offer probably gave a large sigh of relief following the Chancellor&#39s 2003 Budget. It was widely anticipated that the Government would announce changes to the taxation of life assurance that could affect the much loved 5% withdrawal rule. Although nothing materialised on this, there is a proposal to fundamentally change the taxation of chargeable event gains arising under UK life policies and there are some proposed tidying up rules designed to prevent tax avoidance by the deliberate manipulation of the chargeable event rules.

The background to the pre-Budget anxiety over change to the 5% withdrawal rule was the Sandler report which was published in the Summer of 2002. This made important recommendations on life assurance policy taxation. These were that all new life assurance savings policies should be taxed in the same way and, in particular, that:

(i) the qualifying life policy rules should be abolished for new non protection policies; and

(ii) the 5% rule for life policies should be abolished for new business.

However, Sandler recommended that these changes should only apply to new policies.

In the Pre-Budget Report, the Government welcomed the analysis and proposals made in the Sandler report. As far as reforms to the taxation of life assurance were concerned, the Pre-Budget Report statement gave a commitment towards removing distortions and reducing complexity in the savings industry caused by the taxation system in order to increase consumer understanding, reduce the cost of savings advice and strengthen competitive forces; and to consult on the implications of reform with the life industry.

It was clear that prior to the Budget the Government actively researched the viability of implementing the Sandler proposals in this area with a view to making a decision as to whether to implement these changes in the Budget.

In particular, the Government consulted with the Inland Revenue who in turn consulted with the interested parties such as the ABI.

The good news is that the Government have not acted in this Budget to change these rules. However, it would not be prudent to assume that this is the end of the matter. The Government have in the past appeared to be committed to making a firm decision on this and there seems little justification for keeping the qualifying policy rules for investment – based policies other than in special cases such as friendly society policies. So until such time as a later announcement is made, potential investors should continue to take maximum advantage of the favourable benefits of single premium bonds as investments and, when written in a trust investment, as inheritance tax mitigation vehicles. One particularly reassuring fact is that Sandler recommended that any changes should only apply to policies effected after the date of change and so policies taken out now should continue to benefit from the 5% rule even after the date of announcement of any change if it is made.

Notwithstanding the lack of change on the 5% rule and the qualifying policy rules, the Government did use this Budget as an opportunity to make some technical changes to prevent life policy taxation being used as a basis for tax avoidance. There were four main areas of change:-

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