Schedule 35 - Gains on policies of life insurance, etc: rate of tax
Finance Bill
9:30 am
Mr John Healey (Economic Secretary, HM Treasury; Wentworth, Labour)
The amendment is designed to defer the full impact for higher rate taxpayers of the reduction in the rate at which tax is treated, as already paid on gains from life insurance policies. I will put the amendment in the context of the schedule, and will therefore range a little more widely.
The insurance company has paid tax as a proxy for the policyholder, as I explained in my opening remarks on clause 172. As a result of other changes in the Bill, the rate of tax payable by the company on capital gains realised on assets that it holds to meets its obligations to policyholders has been reduced from 22 per cent. to 20 per cent. I can confirm that the £40 million is a net tax saving. It is the net effect of all the life insurance measures. There is a similar reduction this year in the rate of tax payable on income from property.
The changes mean that insurance companies are now not liable at a rate higher than 20 per cent. on any of the income and gains that arise on policyholders'
funds. Other income on the funds has, since 1996, been taxed at a rate equivalent to the 20 per cent. lower rate. Higher rate taxpayers have benefited from the rate reduction since then, as they have continued to be treated as if tax had been paid at the basic rate on all their investment returns.
The amendment does not recognise the fundamental principle of the present taxing regime, which is that a gain on a life policy is income in the year in which it arises and is chargeable to tax in that year at the rates appropriate to that year. If the higher tax rates applying have fallen in the year in which the gain arises, as has generally been the case, the taxpayer will benefit. The amendment also takes no account of the fact that the reduction in the rate of tax payable on gains will benefit all policyholders to a much greater extent than the increase at which the amendment is directed. Nor does the amendment take account of the fact that no one will have to pay tax on this account before January 2006.
The changes proposed by the Government, as part of the package, merely alter the way in which the tax is distributed between the insurance company and the policyholder. They do so in a way that matches what happens and therefore reflects reality.
Since the regime for taxing life insurance was introduced in 1968, there have been up to 20 changes in the tax rates applying to basic rate taxpayers and life insurers. In all that time, under this and previous Governments, there have never been any adjustments of the kind proposed in the amendment. I encourage the hon. Gentleman to pause to reflect on why that is the case. If there had been such changes, policyholders would find them impossible to cope with. There is no good reason to delay introducing the Government's proposal beyond next April. The measure strives for simplicity. There are a few rough edges but, overall, it is a fair and sensible solution and is part of a measure that is of significant benefit to taxpayers. On that basis, I encourage the hon. Gentleman to withdraw the amendment. If he does not, I encourage my hon. Friends to reject it.