Clause 172 - Gains on policies of life insurance etc: rate of tax

Finance Bill – in a Public Bill Committee at 9:15 am on 22nd May 2003.

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Question proposed, That the clause stand part of the Bill.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

The clause establishes new rules that give policyholders a 20 per cent. credit on their paid-out policies so, self-evidently, higher rate taxpayers will pay a further 20 per cent., the equivalent policyholder rate for life companies having been reduced from 22 to 20 per cent. The effect will be that someone who is paid out a 20-year policy, of which 19 years were under the old regime, will get only a 20 per cent. credit although the tax will have been deducted at 22 per cent. or more for the overwhelmingly majority of the policy's life.

We appreciate that that situation is not different from what happened in the past when the basic rate dropped from 25 to 22 per cent., but this matter has not been given much publicity, so policyholders may not be aware of the change in their liabilities. Our forthcoming amendment to the schedule deals with that.

Photo of John Healey John Healey The Economic Secretary to the Treasury

The clause introduces schedule 35. The provisions are part of a number of changes to the tax rates applying to life insurance which will have the combined effect of saving insurers and policyholders an estimated £40 million of tax a year. Under the special taxing rules that apply to life insurance, the capital gains and income arising on the funds held by the insurer to meet its obligations to policyholders are subject to corporation tax in the hands of the company. Insurers pay the tax on income and gains as a proxy for the policyholders. In turn, the

policyholders are treated as having paid tax at the basic rate—currently 22 per cent.—on any gains arising on the benefits that they receive under the policy.

The cut in tax will benefit policyholders generally by increasing the post-investment returns, but it would be illogical and inappropriate for policyholders to continue to be treated as if tax of 22 per cent. had been paid on the gain when the insurer is paying tax only at the maximum rate of 20 per cent. The clause reduces to 20 per cent. the rate of tax that individuals and trustees are treated as having paid.

Photo of John Baron John Baron Conservative, Billericay

Further to the comments made by my hon. Friend the Member for Arundel and South Downs, would it not be fair at least to have some form of transitional provision to cater for cases in which the gain has accrued over a significant period prior to the introduction of the changed regime for insurers?

Photo of John Healey John Healey The Economic Secretary to the Treasury

I believe that the hon. Member for Billericay (Mr. Baron) is a little ahead of himself. That is precisely the debate that we will have when we come to the amendment to the schedule. It will be appropriate to deal with those points then.

The clause will not take effect until next April. That is simpler for taxpayers, who will not have to deal with two rules for the same year, saves insurers from having to make administrative changes overnight and increases the value of the tax cut. Policyholder funds will be boosted at once by the reduction in insurers' tax bills, but no extra income tax will actually be payable until January 2006—in more than two and a half years' time—when income tax for the year of assessment 2004–05 is due. On that basis, I commend the clause to the Committee.

Question put and agreed to.

Clause 172 ordered to stand part of the Bill.