Clause 28
Finance Bill
1:15 pm
Edward Balls (Economic Secretary, HM Treasury; Normanton, Labour)
As we have heard, clause 28 is an anti-avoidance measure that tackles schemes marketed to wealthy investors who seek to avoid tax on savings. Under a typical scheme, the investor takes out a large, short-term life insurance policy, which is cash-based to guarantee investment performance. The avoidance arises because the financial adviser, who arranges the investment, rebates to the policyholder a significant proportion of the commission on the policy, so that in effect all or virtually all the investment return on the policy is made up of commission that is passed on to the policyholder, free of income tax, by the adviser. The hon. Members for Fareham and for Falmouth and Camborne, and my hon. Friend the Member for Wolverhampton, South-West, all reflected an industry consensus that that is an abuse of the system. Indeed, Money Marketing magazine—regular evening reading in our household for us and our three kids—states:
“This change can hardly be a surprise, but the sector must hang its head in shame. To take such a wide view of the commission taxation rules could only lead to this kind of reaction from HMRC.”
Another tax adviser from a senior accounting firm said that that amendment
“ratifies what people have thought for a long period of time, which is that it was abusing a tax concession.”
Therefore, there is a consensus for acting. Some concern was expressed, which I think was allayed in discussions with the industry, the ABI and others, that this part of the clause might also apply to ordinary commission reinvestment arrangements in which the adviser agrees to take a lower level of commission in return for the insurer enhancing the investor’s policy. The clause would not apply in those circumstances, nor is it the intention for it to do so.
In ordinary commission reinvestment arrangements of this type, the value of the policy is enhanced, but there is no increase in the premium. Also, the adviser would not have a strict entitlement to the commission that they forgo; they are not rebating any commission to which they would be entitled, and so the clause would not apply. The outcome is that the full amount of premium paid by the policyholder remains allowable in computing any taxable gain, just as it has always been. It would not have to be reduced by the amount of commission that the adviser had forgone and the policy holder would therefore not be taxed on a gain that they have not realised. I hope that that provides a final reassurance on some of those concerns.
The clause also includes the power to change the premium limit and minimum holding period through regulations. That will enable the targeting of the rules to be changed quickly if new schemes are devised in an attempt to side-step the current criteria—for instance, if schemes become economic for premiums below £100,000. I hope that that also reassures the hon. Member for Fareham. A lot of change is happening in the advisory world and a distribution review is being conducted by the Financial Services Authority. There is no desire through this legislation to slow down or impede shifts from commission to fee-based remuneration schemes. It is our intention that ordinary arrangements, and the kind that I have just set out, would apply in this case. Once again, I hope that that gives some reassurance.
The hon. Member for Fareham also asked about the £100,000 de minimis limit. Arguably, people should know the premium levels that they are paying, especially in a situation in which £100,000 or thereabouts is involved. The aim of the measure is to stop the abuse of commission arrangements that offer a tax-free return on investment over a short period, and it is targeted carefully at the type of policy that is used in those arrangement. As I have said, the measure includes the power to change the premium limit if avoidance schemes become economic for premiums below £100,000.
As I explained, it is not our intention to catch innocent taxpayers who did not take out a policy for avoidance motives but cashed them in early for an unforeseen reason. The clause provides a clear objective test to identify and target the largest short-term policies used in the commission rebate schemes.