Tax review for life insurance: System 'puts British companies at disadvantage against Europe'

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THE TREASURY has begun a review of life insurance taxation in response to concern that the regime puts British companies at a disadvantage to European competitors.

Kenneth Clarke, the Chancellor, recently wrote to the Association of British Insurers about this initiative. He said he had authorised the Inland Revenue to consult the industry on a confidential basis.

The immediate problem arises because of next July's implementation of the European Community directive that will create a single market in life insurance. Some insurers, including Standard Life, believe the Government should seize the opportunity to move to the tax basis used throughout the rest of Europe.

British life insurance is taxed on the investment income during the term of the policy rather than on eventual proceeds. Companies believe they will find it hard to win business from Continental customers used to policies that enjoy a tax-free roll-up of income.

Tony Baker, an ABI spokesman, said a European customer buying a British policy could be taxed twice, on the income in the UK and on the proceeds in his own country.

The ABI believes this 'outward services' problem could be tackled by a narrow exemption that would allow a policy to be taxed according to the regime of the customer's home country. Mr Baker said the ABI hoped the Revenue could produce proposals to be implemented before next July.

But some insurers believe more fundamental change is needed. Iain Lumsden, Standard Life's finance director, said: 'We don't believe that we can go on for ever being the only country in Europe, apart from Ireland, that taxes the roll-up on life policies.'

Without change, Standard Life and others would feel forced to move parts of their business overseas. Some companies are already exploiting anomalies to sell cheaper protection cover to UK customers.