Revenue holds loan protection tax talks

BY NIC CICUTTI

Emergency talks aimed at resolving the political furore over taxation of loan protection insurance have been held between the Inland Revenue and the insurance industry.

The meeting yesterday was described as "amiable and helpful", although no decision is yet being announced on its outcome.

A spokesman for the Association of British Insurers, the industry trade body whose own tax experts were at the meeting, said: "We are hoping to persuade the Revenue that the same rules should apply on loan protection as for mortgage protection.

"There, the Chancellor, [Kenneth Clarke], ruled that benefits paid out would not be taxed.

"The issue has become important because the number of people likely to take out such cover is likely to increase substantially in the next year," the spokesman said.

Yesterday's meeting followed the Government's U-turn last week on its original plan to tax mortgage protection benefits on policies taken out by about two million homeowners.

Many more are expected to take out cover after cuts in mortgage relief planned for October.

Mr Clarke quickly announced that mortgage benefits would not be taxed. But a question mark still hangs over loan and credit card insurance, currently held by more than 11 million policyholders.

Norman Shuker, joint managing director of Pinnacle Insurance, which supplies loan cover to more 700,000 people, said: "I think this one area of tax where the Inland Revenue is perhaps not very familiar with the products, largely because tax has never been paid on them before.

"If they were to seek a half-way house, such as taxing benefits after the second year, the effect would simply be that companies would withdraw any products that last longer than 12 months.

"In turn, this would mean that no extra taxes are paid, but many policyholders would be left with large debts after the first year."

The Inland Revenue yesterday referred all inquiries to the Treasury. A spokesman there said it was too soon to say when a final decision on the issue would be taken.