British expats
Speaking to International Adviser, Jones said the changes may impact British expats holding offshore bonds if they choose to come back to the UK.
“It would depend on if they’re going to come back to the UK at some point. If they do, then they will potentially have this extra flexibility,” he said.
Jones’s comments follow a consultation paper published last week by the UK tax office setting out three possible reforms to the part surrender and part assignment of life policies.
The three solutions, of which only one would be implemented, are: taxing the economic gain; deferring any excessive gains; or introducing a 100% allowance to replace the current annual 5% tax free withdrawal.
Jones believes all the suggested changes are great news for investors.
“I think it’s a win-win situation as it’s easier and fairer when you’ve got people who will be able to take higher withdrawals out of their investment bonds without any tax consequences in the short term,” he said.
Increased flexibility
He likened the reforms to the pension freedoms introduced by the UK government in April 2015, giving people unrestricted access to their savings.
If implemented, the propsoals would change the way taxable income is calculated when money is taken out of investment bonds to ensure that investors did not suffer from “disproportionate” tax bills when accessing their money early.
“It [the proposals] seem to be consistent with the government’s approach to other investments like the pension freedoms where they’re opening up and giving people more options and more opportunities which is good,” said Jones.
100% allowance simplest
He added that introducing a 100% allowance to replace the current 5% tax free limit – so that policyholders can withdraw all of the premiums they have paid into a bond at any time and would only pay tax on any profit the policy has made – is the simplest solution.
Describing the method as a “very simple and very straight forward”, Jones said it would be a good way to increase flexibility for investors.
Neil Chadwick, technical manager at RL360°, agreed and said the changes will make things “a lot better” for policyholders.
“Although all proposals are going to result in a much fairer outcome for the policyholder, the most straightforward and easiest to understand option is to have the ability to withdraw 100% of capital before there is a taxable event,” he said.
He added that the new allowance would also require the “least amount of necessary IT development” on the part of the insurer.
Industry input
Chadwick revealed he is currently in talks with HMRC over how the proposed reforms will affect life companies, admitting that RL360° has “quite a few thousand” UK resident policyholders – although he made clear all policyholders could be affected.
“As an industry we will feed back what our preferred options would be and, depending on the outcome, the entire chargeable events process could significantly change,” he said.
Jones at Canada Life admitted that the new system will also affect all of its customers.
As far as existing policyholders go, he said “transitional arrangements” will be put in place to work out what will happen to those looking to take out money now.
Current system
Under the current system, using part surrender policyholders can take out 5% of the money they have invested in a bond tax free every year over the lifetime of the bond, or with part assignment they can sell up to 5% of the policy every year, again tax free.
However, problems arise when those looking to make large withdrawals in the early stages of their policies, in excess of their 5% allowance, find themselves saddled with a huge tax bill after becoming liable to pay income tax on the full amount of money withdrawn – a situation which affects 600 policyholders in the UK according to HMRC.
