INTRODUCTION

The rules on the taxation of Life policies have been in place for some time and would say that they no longer suit the type of products currently available in the market.

Since 1988 the Inland Revenue has given notice of its intention to alter the treatment of Life Assurance plans with regard to taxation.

Their reasons for change can be summarised as follows:

The current rules are out of date.

The current rules are overly complicated

The current rules cause uncertainty;

The current rules are inconsistent,

Under the rules the consultative document proposed a plan's position with regard to taxation could be either:

Completely exempt.

Exempt from Basic Rate Tax.

Fully chargeable.

It is clear that this move from pre-certification of policies which has classification at entry, to a system in which a plan is tested on exit allows for the introduction of gross investment funds at a later date, bringing us closer to our European neighbours. Indeed European Legislation may force this issue. Although the document was subsequently shelved, many of its elements were evident in the March 1998 Budget and the subsequent Finance Bill.

In the first Budget of the New Labour government, the Chancellor of the Exchequer, Gordon Brown, gave notice of a new savings vehicle which is to be available from 1999, the Individual Savings Account or ISA.

The intention is for ISA to replace both PEPS and TESSAS with the emphasis moved from an annual payment to a more frequent investment, say monthly. Although the amount invested will come from after tax income, all income and or capital gains on the investments will most probably be tax free. These tax incentives may be lost if the plan runs for less than 5 years. The impact on more traditional forms of savings such as endowment policies is likely to be more significant especially if the plans allow for a diversity of investments and are not just deposit accounts.