The Implications of changes to the Capital Gains Tax Regime

Table of Contents

• DATAMONITOR VIEW
  • CATALYST
  • SUMMARY
• ANALYSIS
  • The current capital gains tax structure has provided some advantage to UK life companies selling investment bonds
    • Rates of capital gains tax are subject to an indexation allowance and taper relief
    • The existing CGT system is one that has continuously evolved since it was first introduced in 1965
    • Life insurance companies sell investment bonds and the tax structure has been key to this core part of their business
      • The current tax structure gives some advantage to investment bonds
      • A tax charge can arise whenever a "chargeable event" occurs
      • Top slicing relief
      • An investment bond carries a 5% tax deferred withdrawal allowance
  • In the Pre-Budget Report 2007, the Chancellor focused on personal tax and announced dramatic changes to capital gains tax
    • The most dramatic proposed reform is the introduction of a new 18% flat rate of capital gains tax
    • The abolition of taper relief has implications for the business of life companies
      • The change to CGT
    • Some general implications of the changes to the structure of CGT
    • Life bonds and taxation
    • Life companies and the changes in CGT
      • Investment bonds have special applicability
  • Future strategies for life companies in the UK are difficult to determine in a time of uncertainty
    • The legislative future is unclear, making market predictions very difficult
    • New products may need to be the focus for life companies if investment bonds no longer hold tax advantages.
    • Greater focus on the offshore bond market could help providers bridge the gap
    • Life companies need to consolidate their position in the SIPP market to ensure they keep this market as an important part of their business
    • More direct and worksite marketing of their full range of products and services could improve the position of life companies
      • Direct marketing is sent directly to the consumer and has traceable, measurable results
      • There is also the potential for worksite marketing to become more widespread and change in its nature
    • The government is likely to continue reforms to simplify financial products and services
• APPENDIX
  • Definitions
    • Single premium policy
    • Regular premium
    • New business
    • Wrap accounts
  • Product definitions
    • Life based savings products
    • Life Assurance
    • Single Premium Life
    • With-profit bond
    • Unit-linked bond
    • Income and growth bonds
    • Guaranteed Equity bonds
    • Distribution bonds
    • Purchased Life Annuities
    • Other bonds
    • Annual Premium Life
    • Endowment Policy
    • Whole of Life Insurance
    • Term Assurance
    • Income Protection
    • Critical Illness
    • Collective Life
    • ISAs
    • Personal Pensions
    • Stakeholder Pensions
    • Group personal pensions
    • DSS Rebates
    • Employer Sponsored Stakeholder pension (ESS)
    • SIPPs (Self Invested Personal Pensions)
    • FSAVC (Free-Standing Additional Voluntary Contributions)
  • ABI definitions of distribution channels
    • Independent Financial Advisors (IFAs)
    • Direct sales forces
    • Tied agents
    • Multi-tied agents
    • Bancassurance
    • Direct marketing
    • Telesales
    • Other
  • Methodology
  • Further reading
  • Relevant links
  • Ask the analyst
  • Datamonitor consulting
  • Disclaimer
  • List of Tables
    • Table 1: Rates of capital gains tax
    • Table 2: Indexation allowances to April 1998
    • Table 3: Taper relief (for gains on disposals after April 5, 1998)
    • Table 4: Changes leading to the existing CGT system
    • Table 5: Use of use offshore bonds by IFA clients