HMRC launches consultation on simpler tax of life insurance bonds

 
Annabelle Williams
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HMRC wants to end punitive taxes on people who have misunderstood the rules (Source: Getty)

​Life insurance bonds will be taxed in a simpler way after HMRC launched a consultation into how they should be treated.

The bonds are popular investments but have a notoriously complicated tax structure. They allow people to put money away, watch the capital grow and also take out regular chunks if they want to. But bond holders face punitive charges if they accidentally withdraw more than the allowed amount – which can be a complicated calculation. Many people need a financial adviser to oversee withdrawals.

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Chancellor George Osborne promised to review the way they withdrawals are taxed in the recent Budget, after a case was brought against HMRC by the Lobler family. They faced a hefty tax bill after misunderstanding the rules and taking out too much – and there are 600 such cases each year. “HMRC were embarrassed by the case,” says Rachael Griffin of Old Mutual Wealth. “They want to ensure people don’t end up in this penal situation... The government said it would review the rules to prevent such extreme tax consequences arising, which are completely disproportionate to the growth received on the investment.”

HMRC has proposed three different ways of taxing the bonds. The fairest route would be to allow people to withdraw up to 100 per cent of their initial investment, known as a premium, without incurring a tax charge, Griffin says.

The other options “will make the withdrawal process more complicated and given some customers don’t fully understand today’s process I would argue it doesn’t help solve the issue,” she adds.

The other options “will make the withdrawal process more complicated and given some customers don’t fully understand today’s process I would argue it doesn’t help solve the issue,” she adds.

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