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Shock at income bond tax

The financial services industry was yesterday reeling in the wake of the Treasury's announcement that guaranteed income bonds worth up to pounds 1.5bn may be taxed in the next Budget.

Several companies said they would abide by the guarantees given to their investors and pay any tax liabilities themselves.

Others said they were still studying the implications of the planned changes before making a final decision.

Guaranteed bonds have been one of the insurers' few marketing successes of the past year. They have attracted hundreds of millions of pounds each month from savers by promising higher-than-average income or capital growth, net of tax at the basic rate.

Companies were able to do this largely by underpinning their guarantees with gilt options, which are not presently taxed.

However, the Inland Revenue's proposed shake-up of gilts taxation - revealed in the Independent last week - will mean all profits on these bonds will have to be treated as income and therefore taxable. Losses will be relievable as income.

Abbey National, which sold more than pounds 200m of its own bond in six days last week, said: "As far as we are aware, we will not be taxing customers. They bought this investment from us in good faith and we would not expect to disappoint them."

Scottish Widows has attracted more than pounds 300m of investors' money into its own bond. The company has guaranteed to meet the guarantee. But a spokeswoman would only say yesterday: "We are aware that the Inland Revenue has published its proposals but we have not yet had time to consider it."

Your Money, page 20