Tucked away in Inland Revenue Press Release REV BN 25 which deals with the taxation of Life Insurance Companies is the following statement:
“The Government is also making changes to the rate of corporation tax on the policy holders' share of a life company's profits. The rate of tax on all policy holders' income and gains will be equal to the lower rate of income tax, and no profits will be charged at a rate equal to the basic rate (the rate applying in particular to chargeable gains). This will apply for the financial year 2003 and later. As a consequence, in determining the amount of any additional tax payable on a gain on a UK life policy or annuity contract, policy holders will be treated as having paid tax at the lower rather the basic rate of tax. This change will take effect on 6 April 2004.”
The lower rate for this purpose has been confirmed to be 20%. This would appear to mean that with effect from 6 April 2004 where a higher rate taxpayer encashes a UK single premium bond, he will have a liability to income tax at 20% (ie. 40% less the 20% tax credit) rather than the 18% liability that currently exists. The Inland Revenue have confirmed that basic rate taxpayers will continue to have no liability provided the gain does not exceed the higher rate tax threshold.