CGT is rubbish

Perhaps more accurately CGT for life companies is rubbish.  The arguments below will probably be familiar to most people but worthwhile putting them all in one place.

1. The Rates are Wrong

I think it would be generally accepted that an individual should pay an equivalent amount of tax on the disposal of assets subject to capital gains tax regardless of whether the assets are held directly or via an insurance policy.  Currently individuals pay capital gains at either 18% or 28% with no allowance for indexation and with an annual CGT tax free allowance.

For investments in life policies the rules are complicated.  Firstly there is a liability to policyholder tax in the I+G-E tax charge paid by the insurance company but with the availability of indexation so the effective rate can be any where between 0% and 20%. However, there is no relief corresponding to the individuals personal allowance.

Secondly there is a potential liability to higher rate and additional rate tax.  This is, of course, under the chargeable events legislation so neither indexation nor the personal CGT allowance are available.  This results in a tax charge of 20% for a higher rate tax payer and 25% for an additional rate tax payer.

So if we combine the above but ignore (for the moment) personal CGT allowances we get the following;

				Life Policy		Direct investment
Basic Rate				0% / 20%		18%
Higher rate				20% / 40%		28%
Additional Rate				25% / 45%		28%

Given the availability of personal CGT allowances I think you would get a more equitable outcome if you simply abolished CGT for life companies.  If this were done then the equivalent table would like;

				Life Policy		Direct investment
Basic Rate				0%		18%
Higher rate				20%		28%
Additional Rate				25%		28%

Obviously not a perfect solution but I think better than what we have at present.

2. Loss Relief

Accepting that the abolition of CGT for life companies might not be possible then the next best option would be to retain what we have but allow for CGT losses to have the same loss relief rules as apply to loan relationship assets.  

This would move us away from the situation where a policyholder might be invested in a with profits fund that has both loan relationship and CGT assets.  Given market movements in the last few years the loan relationships will probably be standing at a gain but the CGT assets might be at a loss.  If this happens its quite possible that the policyholder will be taxed on the loan relationship gains but get no relief for the CGT losses.  

This is inequitable .  I suppose that there is an argument that allowing CGT losses to be set against other income and gains in a life company is an advantage that is not available to individuals holding assets directly.  However, this could be seen as a rough quid pro quo  for the fact that individual CGT allowances do not apply to gains on life policies.

3. CGT Legislation is Archaic

In my view CGT legislation as a whole is antiquated.  It creates a structure for taxing gains from scratch that is out of keeping with the way that companies account for gains and as a result causes all sorts of unnecessary problems .  The legislation has also been undermined by HMRC taking measures to improve the tax take that reduce the coherence of the CGT legislation and create traps for the unwary and unfortunate.  If it was decided to do something about the loss relief rules then it might be worthwhile revisiting corporate CGT at the same time.