However, the emergency Budget promised by the Conservatives is still firmly on the agenda and is due to take place on 22 June 2010.
A document posted on the Conservative’s website on 11 May and the coalition’s 34 page document published on 20 May both give a brief insight into the tax measures this Budget may contain by outlining the policy agreements reached by the coalition, including those regarding tax. These documents can be viewed by visiting the following websites:
http://www.conservatives.com/News/News_stories/2010/05/Coalition_Agreement_published.aspx
http://programmeforgovernment.hmg.gov.uk/
Whilst the documents set out the basis for the coalition agreement and do not provide a concrete or detailed outline of future taxation legislation, they do provide enough clues to suggest that insurance bonds may become considerably more attractive to UK investors after the emergency Budget.
Below I set out some of the key reasons why this may be the case.
Capital Gains Tax (CGT) reform
The initial document contained the following comment: “we further agree to seek a detailed agreement on taxing non-business capital gains at rates similar or close to those applied to income, with generous exemptions for entrepreneurial activities.”, which was also mirrored in the follow up publication.
Whether or not the rate for CGT will be 40%, aligning the CGT rate with the previous top rate of income tax, or aligned to the new top rate of 50%, or whether a new form of relief will replace the controversial “entrepreneurs’ relief”, is unclear.
Nor is it clear whether the Liberal Democrat’s policy of reducing the CGT annual exemption to £2000 will be adopted. What is clear is that people holding assets that would be subject to the 18% CGT rate may consider selling before the new rules are in place. Some may argue it may be too late, especially if the change in CGT is backdated to cover any potential surge in asset sales in the coming weeks.
However, even if the CGT rate change is backdated, a client selling now may be no worse off by taking this ‘gamble’ – so it’s perhaps a strategy that many advisers and their clients will still wish to follow.
If the proposed changes to CGT outlined above go ahead, then it would seem that the future for insurance bonds post-Budget is extremely promising. Clearly the re-introduction of a CGT rate that will ‘level the playing field’ can only be good for insurance bonds and, providing there is no ‘sting in the tail’, the insurance industry will likely benefit from such measures as investors seek another home for their monies.
Experience has shown that, for high net worth clients, even with the current 18% CGT rate for non-business assets, offshore investment bonds in particular, when containing income-producing assets, have been an attractive proposition when compared to direct equity investment.
This is because, with an offshore bond, any income from the underlying funds ‘rolls up’ until a chargeable event is triggered.
Offshore bonds can also invest in a wide range of assets and have no tax deducted on their long term business fund, allowing clients to benefit from true gross roll up, as neither the fund nor product are taxed (other than irrecoverable withholding tax on certain funds) on an ongoing basis, the tax charge being deferred until a chargeable event occurs
Inheritance tax and income tax
Also contained in these documents is commentary on inheritance tax. The Conservative’s policy has, for some years, been to increase the Nil Rate Band to £1 million once in power but the current view is that this is unlikely to happen in the near future given the budget deficit they are facing.
Personal allowance increases?
Furthermore, the coalition papers clearly put the Liberal Democrat’s policy of increasing the personal allowance for income tax purposes to £10,000 before any cut in inheritance tax.
A significant increase in personal allowance, which we understand is likely to be made in progressive steps, may also benefit sales of offshore bonds. This is because no tax charge is deducted from the life funds themselves and policies can be assigned to non-tax payers.
A greater allowance corresponds with the ability of non-tax payers to crystallise a larger gain before being subject to tax.
In summary, we will have to wait and see whether the propositions outlined in the agreement documents come through the emergency Budget unchanged.
The small print will, as always, be vitally important and the timing of any changes made will also be important. However, it does seem as though the change of government might just bring with it a much needed opportunity for the insurance industry in general and the offshore bond in particular.
