Death by CGT?

The government’s proposed changes to capital gains tax (CGT) have caused consternation amongst insurance bond providers.

The insurance industry has warned the government that the new CGT regime could severely damage the investment bond industry as it would mean different types of investments would be taxed at different rates, and could make direct investments more attractive from a taxation point of view.

The proposals, due to be introduced in the April 2008 Finance Bill, include the removal of CGT taper relief and the introduction of an 18% flat rate for CGT.

Tax bills on profits from unit trusts and OEICs will therefore be cut from a maximum of 40% to 18%, while gains on insurance-backed products such as investment bonds, which are treated as income, will continue to be charged at the investor’s marginal rate of up to 40%.

Colin Jelley, head of tax and financial planning at Skandia, says that if the changes go ahead as planned it will change the dynamics of the market place.

“But you have to step back from that,” he says.

“The CGT changes have merit in terms of simplification. The old regime was extremely complicated. Tax planning never has been and never will be the sole driver of product choice. Not all customers buy on tax – there are other reasons. If you are going to look at the tax aspects, you can’t just look at the headline rates.”

Steve Whalley, head of marketing at Aegon Scottish Equitable, notes that discussions are ongoing with the Treasury.

“We’re looking at the potential impact. It’s probably fair to say that we won’t really understand what these are until it’s clear what the changes are. There’s obviously a tax story and a non-tax story for bonds; all the non-tax issues stay unchanged. It’s a case of watching and waiting while discussions are going on.”

Jelley also notes that these ongoing discussions mean the proposed changes are far from set in stone.

“We’re not entirely sure exactly how this will pan out. It is early days. We haven’t even seen the draft legislation yet. We have another budget to go before the Finance Bill.”

He believes advisers will continue to do what they have always done: take a considered client-centric view and look at client suitability.

“It will continue to be suitable for some clients to hold investments through insurance bonds, and for others through collectives. You’ve got to look at the effective rate of tax being suffered by the client. What’s the asset allocation, is it mainly growth or yield? Are they in a decumulation or an accumulation phase? Are they using their annual CGT allowance? There are lots of moving parts. In some cases this will make no changes whatsoever, for example if the client is not paying CGT.”

One area where the proposals would have an immediate negative impact on offshore bonds in particular, says Whalley, is the changes to taxation treatment for companies. Companies will be unable to get the tax deferral that was previously available through offshore bonds. Whalley estimates that this could lead to a 5% to 10% reduction in offshore bond sales for providers such as Aegon Scottish Equitable.

1 January 2008