Time for an EU-wide savings vehicle?

Saturday, 01 June 2013
Richard Frimston on the EU assurance bond

Governments never seem very sure whether they want us to spend all our money helping steer the economy out of recession via growth, or to save our money and help the banks rebuild their balance sheets. As with most policymakers, they would probably like us to do both at the same time.

One of the problems in the EU is the question of where and how your government wants you to save. Member states always guard fiscal policy jealously, seeing it as an arm of broader policy. Many states give tax breaks if you lend money to the government. Many also give special status to various sorts of insurance policies. The proportion required for the insurance element varies from not much to quite a lot. Historically, pure insurance could be written in trust in the UK; this had the effect of keeping the proceeds outside inheritance tax.

The history of the UK bond is a long one. The language of savings ‘products’ makes many advisors uncomfortable. Does the sales pitch hide some defects? Is a client being pushed into the wrong box to achieve a sale? The ability under s507 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA) to withdraw 5 per cent of the original capital each year without any chargeable event gain arising is now regarded as immutable. How long it will last with the current miniscule interest rates is another matter.

The offshore bond has developed to produce tax-free roll-up. Other states have similar vehicles. The French assurance vie permits tax-free roll-up and reduced rates of tax on withdrawal. EUR152,500 can also be free of inheritance tax. The Italian piani individuali pensionisticibasati su polizze assicurative, known as PIPs, similarly permit tax-free roll-up and reduced rates of tax on withdrawal.

However, the recent judgment of Judge Christopher Staker in Anderson v HMRC [2013] UKFTT 126 (TC) illustrates what can happen if such things go wrong.

If a bond does not qualify as an offshore bond for UK tax purposes, it will be taxed as a personal portfolio bond (PPB) under s515 to s526 ITTOIA, with generally unhappy results. The deemed PPB gain of 15 per cent compounded is taxable whether or not there is any actual gain. ‘On the face of it this treatment discriminates against persons who take out policies with insurers in other member states of the EU and against insurers in such member states, such that the free movement of capital and the freedom to provide services might be an issue.’ The usual French assurance vie or Italian PIP will not qualify as an offshore bond and will be taxed as a PPB.

Now that London is the sixth largest French city, one does wonder how many residents hold a French assurance vie and are unaware of HMRC’s desire to tax them until something squeaks. ‘In effect… unfairly taxed twice… taxed on the capital when he earned it… then taxed on it again when he withdrew it.’

My experience is that many advisors profess to understand these matters and claim that they can steer taxpayers through this maze to the sunlit Elysian Fields, where an investment vehicle will qualify as a UK offshore bond and also as a French assurance vie or an Italian PIP. However, I don’t think many of such vehicles work. They tend to be more expensive than local products, and they all seem to operate from Luxembourg.

Isn’t this a restriction on my right as an EU citizen to enjoy free movement of capital, services and labour? Why isn’t the EU Commission promoting EU-wide tax-compliant savings vehicles to encourage us all to move around the EU and save while we do so? Is it because they really want us to spend it all or to pay more tax?

‘The Tribunal would however note that the system of taxation of part surrenders in excess of the 5 per cent allowance is one which penalises the unwary or ill-advised, often with quite disproportionate consequences as in this case. HMRC, and for that matter the insurance industry, have been aware of this major fault in the system for many years but have done nothing to correct it.’

Isn’t it time for the savings industry to produce sensible products at reasonable cost and to lobby tax authorities and the EU Commission for the EU assurance bond to be accepted more widely?

Author block
Richard Frimston

Richard Frimston TEP is a Partner and Head of the Private Client team at Russell-Cooke LLP, and Chair of the STEP EU Committee.

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