I’ve had a lot of comments about our previous two blogs*, looking at some of the weird and wonderful reasons why our tax system is as it is (i.e. sometimes even tax experts like M&S are baffled!). Today, we’re looking at why some investments are taxed even when they make a loss.
The investment in question is the single-premium insurance policy, oftenreferred to as bonds. These are, on the face of it, an attractive way to invest because they allow you to take up to 5% a year without tax because the money you make is treated as a return of capital. But (and you just knew there was a but coming, didn’t you…), if you make over 5% then the surplus is taxed as income, even if the policy has not made a profit.
How can this be fair, I hear you ask… Well, the simple answer is that, in my view, it isn’t remotely fair. It comes about as a result of what many regard as excessive anti-tax avoidance legislation (i.e. the unintended consequences of laws that were not as well thought through as they might have been).
Currently the only way out of this hole is to apply to HMRC for relief where the gain is “wholly disproportionate” – under tax rules IPTM3596 – and, I am afraid to tell you, this is only given in what HMRC regards as exceptional cases.
I have seen some tax experts propose as simple solution, viz, a cap on the taxable gain based on the real profits made in the policy. This, of course, would require the Chancellor and Treasury to want to do this…meanwhile, hell resolutely refuses to freeze over…
Vivian Linstrom, M&S Accountancy and Taxation
This, and the other articles in this series, are based on a very interesting article in the Daily Telegraph's business pages that looked at many different, quirky aspects of tax.