HC Deb 18 July 2000 vol 354 cc258-63

'(1) Section 88A of the Finance Act 1989 (lower corporation tax rate on certain insurance company profits) is amended as follows.

(2) In subsection (1) for the words "lower rate income", substitute "lower rate income or gains".

(3) In subsection (3) for the words from the beginning to "following descriptions", substitute— (3) In this section, references to a company's lower rate income or gains for any accounting period are references to all of the chargeable gains of its basic life assurance and general annuity business for the period, and to so much of the income of that business for the period as consists in income of any of the following descriptions—".

(4) In subsections (4), (5) and (6), for the words "lower rate income", in each place where they occur, substitute "lower rate income or gains".

(5) This section has effect for the financial year 2000 and subsequent years.'.—[Mr. Jack.]

Brought up, and read the First time.

Mr. Michael Jack (Fylde)

I beg to move, That the clause be read a Second time.

New clause 1 would make a small—some may even say technical—change to the method of taxing life assurance policies. That small change, however, represents an attempt to bring the way in which the taxation of such policies deals with capital gains tax, in terms of taxation within the policy, into line with the change in the impact of CGT on those with assets whose value increases outside life assurance policies.

I was grateful to the Financial Secretary for writing me a courteous and helpful letter on 1 June, following my first foray into this area. When I raised the subject in general terms when clause 37 was debated in Committee, he agreed to consider my arguments, and wrote me that helpful letter. I was heartened by the beginning of the final paragraph, in which he wrote: I accept that the case for change is not totally without merit. I think I scored seven out of 10. The purpose of this debate is to establish whether we can bring that score nearer, or perhaps all the way, to reality.

When preparing for today's debate—and, indeed, for the debate in Committee—I first wanted to identify the cost implications of my proposal. I therefore tabled a series of parliamentary questions to try to elicit some facts from the Treasury. I think it worth noting how the Treasury responded to a perfectly legitimate request for information.

The taxation formula known as I minus E relates to life assurance policies, and my proposed change relates to that formula. I wanted to know how much it would cost. When I asked the cost of a 1 per cent. change in each rate of tax in the so-called composite that constitutes the life assurance tax rate, the Treasury told me that no estimates were available. When I asked what the tax yield from life assurance policies had been over the past eight financial years, in the context of the I minus E formula, I was told that the information was not available.

I then tried a different tack in an attempt to elicit the truth. I asked for the individual rates that made up the composite taxation rate of life assurance returns each year. I managed to obtain that information from the Treasury, which pointed out that there was an inconsistency between the personal rate of capital gains tax and that used in terms of the I minus E formula.

I have dwelt on those parliamentary answers for a reason. It is remarkable that, when the Financial Secretary finally got around to responding to my points on clause 37, he managed to find out how much my proposal would cost. Let me send this message to the Treasury: when Opposition Back Benchers ask legitimate questions to which they, the public and the insurance industry should be able to obtain answers, they should not have to go through the expensive process of tabling numerous parliamentary questions and being told that the information requested is not available, only to find that—magically—it is available when the Financial Secretary writes a letter.

Some 25 million people, including me, have life assurance policies, which, for them, represent an important part of saving. Many, however, have seen the returns on their policies suffer as a result of changed economic circumstances. The new clause would enable the money saved through the change in capital gains tax—about which I shall say more in a moment—to go back into those policies and, in a modest way, to help increase returns on them, thus counterbalancing some of the market tendencies that have disadvantaged their holders.

The proposal would have the advantage of not discriminating against the life assurance policy as a form of saving. As I have said, changes have been made under section 26 of the Finance Act 1999, which reduced the rate of capital gains tax paid by basic rate taxpayers to 20 per cent. People with assets outside a life assurance policy get that lower rate. Under the present arrangements, those with life assurance policies do not have that advantageous change in the capital gains tax regime incorporated in the composite rate of tax attached to the earnings of life assurance policies.

Originally, when the Financial Secretary wrote to me costing out the proposal, he said that, in his estimate, the proposal would cost £30 million, but the Association of British Insurers observes that the basic rate of tax that has been proposed has dropped to 22 per cent. I should be grateful if the Economic Secretary confirmed that that change in the basic rate of tax reduces the cost of my proposal to £20 million or thereabouts. It is important that there be equitable treatment of capital gains tax within life assurance policies to bring them into line with the way in which capital gains apply outside life assurance policies. That is the purpose of the new clause.

People value the life assurance policy because, effectively, the tax for which they would be liable had they made that investment in some other way is paid for them as the policy appreciates over time. If it is a qualifying policy—that is, one with regular payments lasting 10 years or longer—the situation of effectively receiving the money tax paid applies to both the basic rate and higher rate taxpayer. Therefore, it is a particularly, if you like, tax administrative-friendly form of saving, but I do not see why at this juncture the Government should not agree to make the small change that I propose: to bring into line the external capital gains treatment with the internal capital gains tax treatment in terms of life assurance policies.

The Association of British Insurers, which was most helpful to me in analysing the situation, rightly drew my attention to the fact that, if the change were to come in instantaneously, there might be a problem because the gains within a policy build over time. It may be that the new clause has a technical deficiency that does not necessarily reflect that particular situation. I would take advice from the Economic Secretary on that, but it is the principle that is at stake. If they do not accept my proposal now, the Government should commit themselves to firm action to regularise the position with regard to capital gains tax.

Mr. Flight

I support the new clause. The taxation of insurance companies is one of the mysteries of our culture. The number of people who understand it can perhaps be counted on the fingers of one hand. Time was when it was tax advantageous to save through insurance companies, which was unfair against other forms of saving. That was sorted out about 15 years ago. There is a powerful logic to the point of principle that my right hon. Friend the Member for Fylde (Mr. Jack) makes, which is that, given the changes that the Government have made to the capital gains tax regime, there should be a level playing field between saving within an insurance wrapper and without an insurance wrapper.

The Government have commissioned the Myners report to look into institutional investment in venture capital and to identify why it is not greater. As the Minister will no doubt be aware, one of the main things that it has found is that there is a need for reform of the tax of insurance companies, which do not have the lower capital gains tax incentives on venture capital that are available outside. I believe, therefore, that the rather broad drafting of my right hon. Friend's new clause would address that issue, which the Government's own commission is asking to be addressed.

5.45 pm
Miss Melanie Johnson

I am not aware that the Myners review has reported yet. The hon. Gentleman must be getting his intelligence on that from his tea leaves.

New clause 1 would reduce the rate of tax that life assurance companies and friendly societies pay on capital gains that will contribute to benefits payable to policyholders. As the right hon. Member for Fylde (Mr. Jack) said, the logic behind the new clause is to bring the rate of corporation tax on those gains into line with the rate of tax applied to the capital gains of individuals. There are already rules to ensure that the share of a life company's income needed to fund policyholder benefits is charged to tax at rates equal to the basic rate or the lower rate of income tax, whichever would apply if the income belonged to an individual policyholder.

Before April 1999, the rate of corporation tax on a life company's policyholder gains and the rate applicable to an individual's capital gains did correspond. However, as the right hon. Gentleman said, under the Finance Act 1999 the rate applicable to individual gains was reduced from the basic to the lower rate of tax without a corresponding change in the rate applicable to a life company's gains.

I can confirm that, because of cuts in the tax rates, the cost of the right hon. Gentleman's proposal would be £20 million annually. Therefore, at first sight, his proposal seems logical. However, a more detailed analysis shows that the logic applies only at a relatively superficial level. There are fundamental differences between the regimes for taxing gains made by companies, especially life companies, and the capital gains of individuals. When citing the formula I minus E, the right hon. Gentleman should really have said I plus G—for gains—minus E. That is the right formula.

The right hon. Gentleman raised the same issue in the Committee's debate on clause 37. As he said, my hon. Friend the Financial Secretary wrote to him. In that letter, my hon. Friend set out some of the key differences between the way in which a company's gains are taxed and the way in which an individual's gains are taxed. For the benefit of the House, I shall outline those differences, as they are entirely relevant to whether parity could be achieved as the right hon. Gentleman suggests in new clause 1.

Individuals enjoy taper relief, whereas companies have indexation. Another difference is that individuals have an annual exempt amount below which gains are not taxed. Additionally, life companies can deduct management expenses in computing their liability on chargeable gains, whereas individuals cannot. Life companies are also able to fund payments to policyholders from incoming premiums without realising assets and, therefore, making capital gains. That enables the companies to defer making taxable gains almost indefinitely, and so reduces the effective rate of tax that they pay on the policyholder gains. Those differences mean that a simplistic comparison, or a relatively simplistic comparison, of nominal rates of tax is not a very satisfactory way of comparing effective rates of tax on the gains of life companies and individuals.

Another point is that policyholders who pay higher rate tax on their policy gains get a credit for the basic rate tax. It would be appropriate to reduce that credit if the rate of tax on life company gains were reduced. However, new clause 1 would not do that. Therefore, it would not achieve quite the effect described by the right hon. Gentleman.

I grant the right hon. Gentleman that there are arguments both ways. If the changes that he seeks were to be made, it would have to be as part of a larger package than he is proposing. Although I am not persuaded that such a package would necessarily be right, we shall continue to bear in mind the possibility for future Finance Bills. What is clear is that new clause 1 does not present such a package. Therefore, should the hon. Gentleman press the new clause today, I shall urge the House to reject it. Nevertheless, I concede that, in his proposal, he has achieved seven of 10.

Mr. Jack

It was most generous of the Economic Secretary to agree with my own self-marking. I drew some comfort from her last few words, having tried to grapple with the complexities of life assurance taxation—not always with great success, although I got a general idea of what it was about. If the hon. Lady was indicating that there may be a possibility of further dialogue with the life assurance industry when she said that my proposal would have to be wrapped around by other measures as part of a wider package, is she willing to commit the Treasury and the Revenue to further dialogue with the life assurance industry on this and other points? The industry and I would certainly draw comfort from the fact that the door was not closed on this seven-out-of-10 proposal.

Understandably, the hon. Lady drew attention to the taxation regime for life assurance companies and pointed out that certain tax advantages to companies negated the need for my proposal, but, tellingly, she did not mention that the treatment of capital gains within life assurance policies includes no equivalent to the personal allowance on capital gains. In other words, in respect of the composite rate for capital gains, the clock starts ticking from the first £1, whereas if the same asset were held outside the policy there would be an individual allowance before the capital gains clock started ticking. It is the view of the industry—certainly from my consultation—that that would counterbalance some of the hon. Lady's arguments in respect of the position of a company as opposed to that of an individual.

It comes down to equity. If we make a change to benefit the individual outside the policy in respect of capital gains tax, is it equitable not to benefit the individual who holds their savings in the form of a policy? I am very conscious that on the wider front the savings ratio in the United Kingdom has fallen and that people with life assurance policies have faced particular difficulties. Many events in terms of an individual's future financial outgoings are predicated on good returns being achieved, and the new clause is a small and modest proposal that would help to improve the returns on life policies at a difficult time for that particular savings product. I would very much appreciate a response from the Economic Secretary on that point.

Mr. Burnett

Is the right hon. Gentleman seeking to ensure that only one exemption is available per annum per individual, so that if the exemption is used outside the life policy no further exemption is available within it?

Mr. Jack

Very few individuals actually pay capital gains tax—I think that there are only a couple of hundred thousand. Putting that to one side, my proposal would deal on a continuing basis with a small change in the composite rate in respect of the way in which the formula to which the Economic Secretary referred—I plus G minus E—operates. That is the purpose of the new clause. It would become intolerably complex to try to relate an individual's capital gains tax position in respect of assets held outside the policy to those within it. That is certainly not part of my proposal.

I conclude by asking the Economic Secretary to be kind enough to respond to my point about the proposal being part of a package and the possibility of opening dialogue with the industry so that, if necessary, the subject may continue to be discussed in the round.

Miss Melanie Johnson

First, let me return to a point that I should have answered earlier, which was mentioned by the right hon. Member for Fylde (Mr. Jack) in his opening remarks. He referred to the answers he received to parliamentary questions. He formulated questions requiring breakdowns of figures that were not available; he did not ask the question that my hon. Friend the Financial Secretary then answered. My hon. Friend explained the costs of reducing the rate of corporation tax on policyholders' chargeable gains from 23 to 22 per cent., but the right hon. Gentleman had not asked that question. Therefore, the mystery that he attached to the fact that the answer was available is not a mystery at all.

Also, in response to the right hon. Gentleman's argument about the exempt amount for life companies, I have already said that there is no exempt amount, but there are several factors pointing the other way. I have gone through the list and I am prepared to go through it again. It is a matter of balance.

The right hon. Gentleman referred to equity. I think that he did not use the right word in this context and that his argument was more about parity. There are a number of factors which cut both ways. As I hope I have explained, the matter is more complicated than the issue that he is raising in new clause 1.

I am not making a specific commitment to dialogue at this point; however, we will keep the matter in mind. Obviously, there will be future Budget rounds and discussions. As I am sure the right hon. Gentleman is aware, I regularly meet representatives of the insurance industry and the Association of British Insurers. I am sure that there will be opportunities for discussion, but I am making no commitment to introduce any future package. As I said, such a package would probably be the right way to achieve the right hon. Gentleman's objective, and I accept that there may be some arguments in favour of that objective. I hope that I have persuaded him to withdraw the new clause.

Mr. Jack

I accept what the Economic Secretary said about the word "parity" as that would achieve the same purpose. She has set a challenge to the insurance industry to use the opportunities of discussion with the Treasury and the Revenue to develop a package in which my proposal might find a place. However, I would not expect her to commit herself at this stage.

As for my parliamentary questions, I think that those who draft the answers to questions were pretty clued up as to why I was asking them, so it was disappointing that rather than the negative answers that I received there was not a little more imaginative drafting. However, given the assurances about future dialogue and the fact that no doubt the industry will want to rise to the challenge, I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn

Forward to