In a little-noticed measure, about 5,000 investors will be taxed as if they had made a 15 per cent gain on their investments - even if they have not made any money.
The measure,part of the Government's clampdown on tax loopholes, is targeted at holders of "personal portfolio bonds" - insurance-linked policies which allow investors to pick their own stocks.
The Revenue claims the bonds are used for tax avoidance by offshore investors. It claims they avoid paying income tax as investments grow but then move abroad when the policy matures, escaping tax altogether. But financial advisers are attacking the Revenue for what they say is a penal tax with no fiscal justification, in direct defiance of a decision by the House of Lords last year. They say policies have been issued to thousands of investors in the UK who will pay tax when policies mature.
While other life insurance policies have the same tax advantages the Revenue is imposing the charge only on personal portfolio policies.
Michael Bryant, chairman of Fraser Smith, the independent financial adviser, said: "Investors in these bonds pay no less tax than investors in any other type of insurance-linked investment bond. Bringing in a tax on deemed, artificial profits smacks of penal taxation."
The Budget move runs against a Lords ruling last year when the Law Lords decided that investments could not be taxed differently just because they offered the chance to choose investments.
Kim North, of London-based IFA Pretty Financial, said: "It is unfair on the investors. Even if there is no gain it is still going to be assumed that there is a gain and some of the investors are going to be penalised. It's a bit of a shock that the Revenue has over-ridden the Lords decision. It is a retrospective attack on the policies."
The advisers say the Revenue is simply trying to abolish the policies by the back door. It has set a deadline of April next year before imposing the charge, effectively forcing holders to surrender policies. "Delaying the charge for one year so that investors can surrender existing arrangements, perhaps with additional tax and surrender charges, smacks of bullying," Mr Bryant said.
A spokesman for the Revenue said: "The changes will affect only a narrow range of financial products. Often the assets in these products are assets that were held before by the policyholder."Reuse content