The Association of British Insurers (ABI) is calling for protection policies to be removed from the Finance Bill's scope.
Ahead of the Finance Bill standing committee’s meeting tomorrow, Stephen Haddrill, director general of the ABI, argues the government’s amendments on life insurance taxation do not go far enough and believes protection policies should be removed from the scope of the proposals.
Before the Finance Bill was introduced people could put life assurance policies under trust to ensure they were outside their individual estate and did not attract a potential tax charge of 40%.
But Chancellor Gordon Brown announced in his budget he would change the rules so people would not necessarily save 40% by putting policies in a trust.
If someone puts a protection policy in a trust under the current proposals most of the policy will be protected but some will still be subject to tax.
Haddrill argues protection policies should fall outside the bill because they allow policyholders to provide for their dependents against financial hardship in the event of serious illness or death.
He states: “The government should not tax prudence.”
Lucy Butler, press officer at the ABI, explains the Finance Bill aims to put a tax on the transfer of wealth between generations, but as insurance policies are not like cash and are meant to protect a policyholder’s family they should not fall within its scope.
Moreover, she argues without such policies some families could end up becoming a liability for the state.
Similarly, Roger Edwards, products director at Bright Grey, argues the current proposals mean a policyholder’s family will not receive a payout immediately when the policyholder dies because they will have to wait until probate is settled.
Many people may have to get a ‘bridging loan’ because under probate laws they will not be allowed to get the payout until the tax is paid, and may not be able to afford the tax until they get the payout.
Edwards adds: “Companies like Bright Grey have been jumping on the drum and telling IFAs they must put life assurance policies under trust because otherwise they are creating a tax liability. Just when the message was beginning to drop the government changed the rules and added complication. It re-introduced uncertainty.”
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