Tax shake-up 'huge blow to insurers'

SCOTSMAN EXCLUSIVE

GOVERNMENT plans for capital gains tax could deal a "huge blow" to Britain's £120 billion unit-linked bond business, the head of the UK's insurance industry has warned.

Archie Kane, chairman of the Association of British Insurers, said the proposed CGT changes would create "an unlevel playing field" in relation to other kinds of investments.

In a rare public intervention, Kane said planned tax changes would both hit the industry and reduce consumer choice.

Speaking just weeks before the Budget, Kane said: "I just do not see any positives in damaging such an important sector as an unintended consequence of doing something elsewhere."

Kane revealed that the ABI had been lobbying the Treasury in the hope that Chancellor Alistair Darling would address the threat to the insurance business.

He said if the Chancellor did not act it could be another negative development, following the tax on non-domiciles, and drive foreign investment away from these shores.

Kane, who is also chief executive of Edinburgh life assurer Scottish Widows, told The Scotsman: "The CGT changes as they are envisaged disadvantage the insurance bond product market and could have a very big impact.

"It is an extremely serious issue for the industry.

"It creates an uneven playing field, and my view is that it would be a huge blow if implemented as it stands. It could also reduce consumer choice if the insurance bond product market is badly dented."

Peter Vipond, the ABI's director of financial regulation and taxation, revealed there were currently about three-quarters of a million such bond product policies active in Britain. As investments they perceived as less risky than equities but with potentially higher returns than bank accounts. They are particularly popular with people in their fifties planning for retirement.

Insurance bond products can be invested in a number of areas, including European commercial property, UK and foreign equities, cash and government bonds.

Crucially, gains on them are treated as income tax: 20 per cent basic rate and at 40 per cent for higher-rate taxpayers.

The Chancellor proposed in his Pre-Budget Report to set capital gains tax at 18 per cent, replacing a previous tapered level between 10 and 40 per cent.

The ABI says the disparity in the taxation of returns would make pumping money into alternative investments, such as open-ended investment companies (oeics), more attractive to consumers than the bond products.

Hinting at his frustration, Kane said the ABI had had "protracted" discussions with the Treasury after a number of chief executives of British insurance companies had said they were worried about the proposals.

Asked about the Treasury's response, Kane said: "They do understand. We would hope we would get some sort of redress."

Kane said he could "see both sides" of the argument as Widows sold a full array of investment products, including oeics, which are similar to unit trusts.

However, the ABI chairman added: "There's is also a danger that the disadvantages to the bond product market would not help the UK in terms of foreign investors in financial services.

"It could be just another negative if a global company was looking at the UK as a possible base."

Kane said he accepted that the government had not meant the bond product market to suffer via CGT changes "but outcomes are more important than inputs".

The ABI is hoping the Chancellor will address the issue in his Budget speech on 12 March.

A Treasury spokesman said: "We are aware of the issues this raises and we are currently discussing it with the industry."

NEIGHBOURLY CHAT

IT MAY be handy for the ABI's lobbying of the Treasury that Archie Kane and Alistair Darling are not exactly strangers.

The Chancellor's Edinburgh South West constituency just happens to include the headquarters of Scottish Widows, the Lloyds TSB subsidiary of which Kane is chief executive.

People who know him say Kane, right, is likely to be a formidable advocate for the ABI in the matter.

The 55-year-old insurer mixes urbanity with a no-nonsense style.

And if, as he inevitably will, he bumps into his firm's local MP he will, without doubt, tell him exactly what he thinks.

The fact that Kane does not relish the public glare shows how seriously he regards the issue of the bond products, and the danger the government's stance poses to his, and other, companies.

Kane is credited with turning around Widows' fortunes since predecessor, Mike Ross, was jettisoned from the organisation in 2003 in the midst of bad times for the insurance industry.

Widows' fund manager Swip, in particular, has flourished since he joined and last Friday announced profits up 52 per cent to £44m.