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The Actuary The magazine of the Institute & Faculty of Actuaries

UK Budget

While not making headlines in the popular press, the recent Budget did include some items of interest to life companies. These are described in Budget Notes 13, 24, and 25 on the Inland Revenue website. Of most immediate interest to many is the change to the policyholders’ tax rate which, inter alia, will have an impact on unit pricing. The relevant text is reproduced below:

‘11 The government is also making changes to the rate of corporation tax on the policyholders’ share of a life company’s profits. The rate of tax on all policyholders’ income and gains will be equal to the lower rate of income tax, and no profits will be charged at a rate equal to the basic rate (the rate applying in particular to chargeable gains). This will apply for the financial year 2003 and later. As a consequence, in determining the amount of any additional tax payable on a gain on a UK life policy or annuity contract, policyholders will be treated as having paid tax at the lower rather than the basic rate of tax. This change will take effect on 6 April 2004.’

Life tax

Following the Inland Revenue press release of 23 December 2002 announcing a number of proposed changes to life tax (see Jan/Feb 2003 issue, p6), the draft legislation and explanatory notes were published on 21 January. My colleagues on the Life Tax Working Party and I have studied these and concluded that the changes can reasonably be regarded as closing existing loopholes rather than an extension to or change in the tax base.

The new legislation regarding contingent loans is complex but ultimately common sense, the end result being that surplus is taxed with no untoward side-effects. There are also some drafting errors, particularly regarding transfers, but these will be corrected in the final legislation.