Insurers angry over Brown stealth tax

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The Independent Online

Norwich Union, Britain's biggest insurance company, yesterday accused Gordon Brown of planning to introduce a new stealth tax on millions of endowment and pension investors.

Norwich Union, Britain's biggest insurance company, yesterday accused Gordon Brown of planning to introduce a new stealth tax on millions of endowment and pension investors.

Gary Withers, the chief executive of Norwich Union Life, said the Chancellor's proposal for an increase in the tax rate paid by insurers represented "a straightforward raid on savers".

The dispute follows the publication of an Inland Revenue note alongside Wednesday's Budget, which revealed that the Treasury is to press ahead with a tax on with-profits investment funds.

The funds, worth billions of pounds across the insurance industry, are invested on behalf of savers who pay into products such as endowment policies and pension plans. However, insurers accept that some of the cash in the funds represents surplus assets, money which is not immediately identifiable as belonging to current policyholders.

From July, the Treasury is to tax returns on this cash at the 30 per cent Corporation Tax rate, rather than the 20 per cent rate paid on policyholders' funds, on the grounds that insurers' shareholders have an interest in the surplus money.

The Inland Revenue said the change would raise just £30m in the 2005-06 tax year, but some insurers are concerned that the bill could be much more substantial.

Norwich Union has calculated that the tax will cost its with-profits fund alone some £140m over the next 10 years.

Mr Withers added: "There is no good reason why these rules need to be changed. This is the wrong sort of tax at a time when we are supposed to be encouraging people to save more."

However, the Association of British Insurers, which has been arguing against the change since it was first suggested in last December's pre-Budget statement, now admits that at least some with-profits assets will be taxed at the higher rate. Lucy Butler, a spokesperson for the ABI, said: "We are now discussing how this tax charge will be apportioned - which funds will be charged at the higher rate."

The ABI said it had so far been unable to calculate exactly how policyholders would be affected. "It's impossible to say exactly how much this will cost savers but it is clearly bad news," Ms Butler added.

In theory, insurers could find the new tax limits their flexibility to invest in more aggressive assets, if the solvency of their with-profits funds is also hit by a repeat of the poor market performance of 2000 to 2002.

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