HM Treasury has announced key revisions to its original proposals for anti-avoidance measures affecting the with-profits sector, set for inclusion in the Finance Bill 2006.
First published last month the proposals seek to implement anti-avoidance tax measures on surplus assets not set aside for with-profits policyholders – although not on statutory reserves.
The key changes outlined by economic secretary Ivan Lewis, and which are intended to bring greater clarity are stated as:
The legislation will also be redrafted to define ‘insignificant proportion’ by reference to liabilities rather than numbers of policyholders or annuitants. Exactly what this may mean in terms of a percentage figure is not yet certain, although it is understood previous Treasury practice may yield a figure of around 5% of liabilities as the cut-off point for determining whether a company is affected by the measures or not.
As outlined last month, the measures are thought to have developed out of a realisation that listed companies formerly of mutual status may be still working on a 90:10 fund apportionment model – as against a 100:0 model – which would mean only 90% of with-profit fund assets would go to policyholders.
Companies have also been seen by the Treasury as reducing their tax liabilities by listing excess assets for regulatory purposes at book value rather than market value.
Suggestions last month were that life companies overall could be hit with a tax bill running into hundreds of millions of pounds, but that industry simply did not know the full potential impact because of the loose definitions and wording used in the document.
It is industry responses to this uncertainty that have driven the Treasury to back-track in terms of significantly tightening up its definition of which types of businesses could be affected by the measures, and just how it may apply the measures on a retrospective basis.
The Association of British Insurers(ABI) says the proposals as they now stand will “tax all movements in investment reserves of non-profits business from 31 December 2003.”
However, despite the retrospective stance, the Treasury has now also decided that it will not be applying the anti-avoidance measures to all investment reserves as if they all were built up in the past couple of years.
"The transitional rule for the straddling period will be amended so that instead of being taken to be nil, opening value will be taken as the closing value for the year ended 31 December 2003," Lewis says.
This means, for example, that investment reserves that started being built up as far back as 1990 would not be taxed as if thier balances had ballooned from 'nil' on 31 December 2003 to today's value, but rather would be looked as having made gains from the level at which they stood on that date up until the present time.
This change in the wording will focus the measures on companies that have set up investment reserves in the past year or two, rather than penalise those providers that may have had such reserves in place for a decade or more, the ABI says.
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