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Mr. Flight: I support the new clause. The taxation of insurance companies is one of the mysteries of our culture. The number of people who understand it can perhaps be counted on the fingers of one hand. Time was when it was tax advantageous to save through insurance companies, which was unfair against other forms of saving. That was sorted out about 15 years ago. There is a powerful logic to the point of principle that my right hon. Friend the Member for Fylde (Mr. Jack) makes, which is that, given the changes that the Government have made to the capital gains tax regime, there should be a level playing field between saving within an insurance wrapper and without an insurance wrapper.
The Government have commissioned the Myners report to look into institutional investment in venture capital and to identify why it is not greater. As the Minister will no doubt be aware, one of the main things that it has found is that there is a need for reform of the tax of insurance companies, which do not have the lower capital gains tax incentives on venture capital that are available outside. I believe, therefore, that the rather broad drafting of my right hon. Friend's new clause would address that issue, which the Government's own commission is asking to be addressed.
New clause 1 would reduce the rate of tax that life assurance companies and friendly societies pay on capital gains that will contribute to benefits payable to policyholders. As the right hon. Member for Fylde (Mr. Jack) said, the logic behind the new clause is to
Before April 1999, the rate of corporation tax on a life company's policyholder gains and the rate applicable to an individual's capital gains did correspond. However, as the right hon. Gentleman said, under the Finance Act 1999 the rate applicable to individual gains was reduced from the basic to the lower rate of tax without a corresponding change in the rate applicable to a life company's gains.
I can confirm that, because of cuts in the tax rates, the cost of the right hon. Gentleman's proposal would be £20 million annually. Therefore, at first sight, his proposal seems logical. However, a more detailed analysis shows that the logic applies only at a relatively superficial level. There are fundamental differences between the regimes for taxing gains made by companies, especially life companies, and the capital gains of individuals. When citing the formula I minus E, the right hon. Gentleman should really have said I plus G--for gains--minus E. That is the right formula.
The right hon. Gentleman raised the same issue in the Committee's debate on clause 37. As he said, my hon. Friend the Financial Secretary wrote to him. In that letter, my hon. Friend set out some of the key differences between the way in which a company's gains are taxed and the way in which an individual's gains are taxed. For the benefit of the House, I shall outline those differences, as they are entirely relevant to whether parity could be achieved as the right hon. Gentleman suggests in new clause 1.
Individuals enjoy taper relief, whereas companies have indexation. Another difference is that individuals have an annual exempt amount below which gains are not taxed. Additionally, life companies can deduct management expenses in computing their liability on chargeable gains, whereas individuals cannot. Life companies are also able to fund payments to policyholders from incoming premiums without realising assets and, therefore, making capital gains. That enables the companies to defer making taxable gains almost indefinitely, and so reduces the effective rate of tax that they pay on the policyholder gains. Those differences mean that a simplistic comparison, or a relatively simplistic comparison, of nominal rates of tax is not a very satisfactory way of comparing effective rates of tax on the gains of life companies and individuals.
Another point is that policyholders who pay higher rate tax on their policy gains get a credit for the basic rate tax. It would be appropriate to reduce that credit if the rate of tax on life company gains were reduced. However, new clause 1 would not do that. Therefore, it would not achieve quite the effect described by the right hon. Gentleman.
I grant the right hon. Gentleman that there are arguments both ways. If the changes that he seeks were to be made, it would have to be as part of a larger package than he is proposing. Although I am not persuaded that
Mr. Jack: It was most generous of the Economic Secretary to agree with my own self-marking. I drew some comfort from her last few words, having tried to grapple with the complexities of life assurance taxation-- not always with great success, although I got a general idea of what it was about. If the hon. Lady was indicating that there may be a possibility of further dialogue with the life assurance industry when she said that my proposal would have to be wrapped around by other measures as part of a wider package, is she willing to commit the Treasury and the Revenue to further dialogue with the life assurance industry on this and other points? The industry and I would certainly draw comfort from the fact that the door was not closed on this seven-out-of-10 proposal.
Understandably, the hon. Lady drew attention to the taxation regime for life assurance companies and pointed out that certain tax advantages to companies negated the need for my proposal, but, tellingly, she did not mention that the treatment of capital gains within life assurance policies includes no equivalent to the personal allowance on capital gains. In other words, in respect of the composite rate for capital gains, the clock starts ticking from the first £1, whereas if the same asset were held outside the policy there would be an individual allowance before the capital gains clock started ticking. It is the view of the industry--certainly from my consultation--that that would counterbalance some of the hon. Lady's arguments in respect of the position of a company as opposed to that of an individual.
It comes down to equity. If we make a change to benefit the individual outside the policy in respect of capital gains tax, is it equitable not to benefit the individual who holds their savings in the form of a policy? I am very conscious that on the wider front the savings ratio in the United Kingdom has fallen and that people with life assurance policies have faced particular difficulties. Many events in terms of an individual's future financial outgoings are predicated on good returns being achieved, and the new clause is a small and modest proposal that would help to improve the returns on life policies at a difficult time for that particular savings product. I would very much appreciate a response from the Economic Secretary on that point.
Mr. Burnett: Is the right hon. Gentleman seeking to ensure that only one exemption is available per annum per individual, so that if the exemption is used outside the life policy no further exemption is available within it?
Mr. Jack: Very few individuals actually pay capital gains tax--I think that there are only a couple of hundred thousand. Putting that to one side, my proposal would deal on a continuing basis with a small change in the composite rate in respect of the way in which the formula to which the Economic Secretary referred--I plus G minus E--operates. That is the purpose of the new clause. It would become intolerably complex to try to relate an
I conclude by asking the Economic Secretary to be kind enough to respond to my point about the proposal being part of a package and the possibility of opening dialogue with the industry so that, if necessary, the subject may continue to be discussed in the round.
Miss Melanie Johnson: First, let me return to a point that I should have answered earlier, which was mentioned by the right hon. Member for Fylde (Mr. Jack) in his opening remarks. He referred to the answers he received to parliamentary questions. He formulated questions requiring breakdowns of figures that were not available; he did not ask the question that my hon. Friend the Financial Secretary then answered. My hon. Friend explained the costs of reducing the rate of corporation tax on policyholders' chargeable gains from 23 to 22 per cent., but the right hon. Gentleman had not asked that question. Therefore, the mystery that he attached to the fact that the answer was available is not a mystery at all.
Also, in response to the right hon. Gentleman's argument about the exempt amount for life companies, I have already said that there is no exempt amount, but there are several factors pointing the other way. I have gone through the list and I am prepared to go through it again. It is a matter of balance.
The right hon. Gentleman referred to equity. I think that he did not use the right word in this context and that his argument was more about parity. There are a number of factors which cut both ways. As I hope I have explained, the matter is more complicated than the issue that he is raising in new clause 1.
I am not making a specific commitment to dialogue at this point; however, we will keep the matter in mind. Obviously, there will be future Budget rounds and discussions. As I am sure the right hon. Gentleman is aware, I regularly meet representatives of the insurance industry and the Association of British Insurers. I am sure that there will be opportunities for discussion, but I am making no commitment to introduce any future package. As I said, such a package would probably be the right way to achieve the right hon. Gentleman's objective, and I accept that there may be some arguments in favour of that objective. I hope that I have persuaded him to withdraw the new clause.