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Taxation of policyholders of UK policies

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&#39 share of a life company&#39s profits. The rate of tax on all policy holders&#39 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.

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