Industry reaction
David Downie, technical manager at Standard Life, said: “It is good news that we now have a remedy for those investment bond owners who unwittingly face a large tax charge as a result of surrendering part of their bond.
“Many bonds are set up with multiple identical segments for flexibility on encashment – allowing each segment to be surrendered independently. But occasionally if the surrender is taken from all the segments it can lead to an unexpected chargeable gain which bears no resemblance to the actual investment performance.
“The introduction of a clear and easy to follow rectification process will give savers peace of mind without adding further complication to the chargeable events legislation.
“As more bond providers adopt the ‘ABI best practice’ on surrenders, the number of cases slipping through the net and requiring rectification should be minimal.”
‘Positive outcome’
Neil Jones, technical manager at Canada Life International, said he will need to see the final guidance to ensure that the change will have a ‘positive outcome’ for policyholders.
“HMRC has been concerned when people who hold investment bonds take a partial surrender well in excess of the 5% allowance and are forced to pay tax on a chargeable gain out of proportion to the investment gain on the bond.
“Following a consultation on partial surrenders from life insurance policies the government has confirmed it will legislate in the Finance Bill 2017 to allow applications to be made to HMRC to have the charge recalculated on a ‘just and reasonable basis’ from April 2017.
This will give investors a way of correcting a typical problem that arises when mistakes lead to large and artificial chargeable gains being taxed. HMRC has obviously decided against the introduction of a 100% allowance.
“The government has said that this change will lead to positive outcomes for policyholders – but we will need to see the final legislation and guidance around this to see how this will work in practice.”
