Proposed changes to the UK's capital gains tax (CGT) regulations will increase the funds available to invest in structured products and mutual funds. The new rules will bring CGT liability for structured products and mutual funds into line with the charges imposed on the life assurance investment industry. Investments in life assurance are currently running at around £30 billion, and it is this money that is being targeted by both the structured products and mutual funds industry.
In brief, structured products that are based on growth (rather than income) have been subjected to CGT. While CGT was at 40%, it was easy to understand why investors could be persuaded to invest in the life assurance industry, where investments allow for a drawdown of 5% of the total investment for up to 20 years, with the tax deferred until the end of the investment period. The trick here is paying the tax due when you retire - at which point your tax liability on income drops to 20%. In effect, the deferral means that the investor only pays lower (ie. retirement rate) tax. For higher-rate taxpayers - who would be subject to 40% (or more likely 36% - it's complex, don't ask) income tax - the attraction of life assurance is obvious.
The proposed changes will reduce the tax on structured products and mutual funds to 18%, the same as the life assurance industry. In fact, from a tax point of view, it will be cheaper to buy structured products and mutual funds than it is to invest in life assurance.
The final decision on the changes will be made on or before April 2008, when the new regulation is due to become law. In the meantime, we will find out how powerful the lobbying of the life assurance industry is. Its members have already registered their objection to a rule that should see them lose what appears to be a rather arcane competitive edge.
In this issue of the magazine, we feature the results of the Structured Products Awards for Excellence in Europe. While congratulating the winners, we would like to thank all of you for the quality and quantity of the submissions and the accompanying interviews. I look forward to seeing you at the awards ceremony, to be held at the Park Lane Sheraton, London on the evening of November 13.
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The week on Risk.net, November 17–24, 2017Receive this by email