New Clause 29 - Life insurance: rate of tax on insurance company chargeable gains and treated as paid on policy gains (No. 2)

Part of Finance Bill – in a Public Bill Committee at 6:00 pm on 25 June 2002.

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Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs 6:00, 25 June 2002

I beg to move, That the clause be read a Second time.

The new clause must be probing because under the Ways and Means resolution requirements, it cannot address the second half of what is required. However, it would address what the Minister would agree has been an anomaly since the Finance Act 1999 by reducing the amount of tax paid by life insurance companies on policyholder capital gains from 22 to 20 per cent. I would like it to make a matching reduction in tax credits for higher-rate taxpayers who receive taxable proceeds from life policies.

The new clause would restore equality of tax treatment between those who save through life insurance policies, and those who save directly or through unit trusts. The Finance Act 1999 reduced the rate of capital gains tax paid by basic rate taxpayers from 22 to 20 per cent. without making a matching reduction in the rate of corporation tax paid by insurance companies on investment-backing life insurance saving policies. Few basic rate taxpayers—about one in 250—pay any capital gains tax because of the annual exemption. In contrast, all the 25 million individuals who save through life insurance policies indirectly pay some capital gains tax each year, as life companies have to pay corporation tax on policyholder capital gains with no equivalent to the exemption limit.

The amounts in 1999 and 2000 were substantial, which may be one reason why the Government have dragged their feet on dealing with the problem. However, one unforeseen result of the fall in share prices over the past two years, which sadly continues, is that the Exchequer cost of removing the anomaly and the rate differential is now relatively small—some £10 million—compared with the total corporation tax paid by the life insurance companies, which was some £2.7 billion in the last year for which figures are available.

I hope that the Paymaster General agrees that this anomaly is unfair and needs correcting. As I pointed out at the beginning, it is necessary to reduce the rate paid by life insurance companies and to reduce the credit from 22 to 20 per cent. for higher-rate taxpayers.