Life policies etc: effect of rebated or reinvested commission

Question proposed, That the clause stand part of the Bill.

Again, this is one of those areas where I think that there is consensus, not just between the Opposition and the Government, but between the various professional bodies, too. The consensus is that there are schemes that misuse life insurance and the practice of rebating commission to create an untaxed gain.

I want to ask the Minister two questions about the clause. As we both know, and welcome, most financial advisers are moving away from commission-based remuneration towards fee-based remuneration. That might be achieved by an adviser rebating the commission back to his customer, who would then pay a fee instead. Alternatively, the adviser may augment the amount that is being reinvested on behalf of his client. Does the Economic Secretary believe that such a course might slow down the shift from commission-based to fee-based remuneration? Might it act as a barrier?

The anti-fragmentation rule asks people to see whether the total value of three years’ life assurance policies exceeds £100,000. There has been some concern about how easy that will be to administer. Will the Economic Secretary confirm whether the £100,000 de minimis limit—depending on how it crops up in successive clauses—will apply only to life policies for which commission has been waived? Or will it apply to all life policies that an individual might have?

I shall be brief, because there is consensus on this matter. The Association of British Insurers welcomes  the clause as a targeted anti-avoidance measure that has been introduced after it was informally consulted. The Chartered Institute of Taxation said that the proposed changes appear reasonable, and the Institute of Chartered Accountants for England and Wales said:

“We understand and support measures to counter tax avoidance”.

There is a recurring theme of concerns about the complexity of the provisions, however. Both the Chartered Institute of Taxation and the Institute of Chartered Accountants for England and Wales suggested that the complexity reflects the wider need for a process of corporation tax reform. In particular, the ICAEW said:

“It would have been more comprehensible to have made a fresh start and for the existing legislation to be replaced by a better targeted alternative, preferably in Tax Law Rewrite style. We would welcome a commitment that these provisions are reworked at an earlier stage to make them more comprehensible.”

I wonder whether the Economic Secretary has any comments in response to those suggestions.

During the consultation process and at the Finance Bill open day, the Chartered Institute of Taxation highlighted circumstances in which genuinely commercial transactions could be caught, such as those in which commission has been waived or where there is a professional obligation not to take commission. HMRC agreed to examine cases of individuals who have taken out a policy with the intention of drawing down not more than 5 per cent, but whose circumstances have changed with regard to their care, for example, and whose costs have increased by more than 5 per cent. They then suddenly find themselves having to draw down more than 5 per cent. The question is whether there should be a motive test to distinguish people who try to avoid tax from those who may inadvertently be caught in such a situation.

For the sake of completeness, I should say that I am shortly going to a dinner of the Association of British Insurers, although that will principally be to discuss the effects on the insurance industry of climate change. It is worth underlining what the hon. Lady said: the ABI, which represents 400 insurers, covering 94 per cent. of domestic insurance, said that it broadly welcomes the clause as drafted.

I want to give the Government a pat on the back. All too often, for understandable reasons, we sit in the Committee with submissions from various bodies that have concerns about the import of certain measures or the way that they are introduced. This measure is broadly welcomed, however, and the ABI has taken the trouble to circulate—to all members of the Committee, I suspect—a message to the Government saying, “Well done.”

As we have heard, clause 28 is an anti-avoidance measure that tackles schemes marketed to wealthy investors who seek to avoid tax on savings. Under a typical scheme, the investor takes out a large, short-term life insurance policy, which is cash-based to guarantee investment performance. The avoidance arises because the financial adviser, who arranges the investment, rebates to the policyholder a significant  proportion of the commission on the policy, so that in effect all or virtually all the investment return on the policy is made up of commission that is passed on to the policyholder, free of income tax, by the adviser. The hon. Members for Fareham and for Falmouth and Camborne, and my hon. Friend the Member for Wolverhampton, South-West, all reflected an industry consensus that that is an abuse of the system. Indeed, Money Marketing magazine—regular evening reading in our household for us and our three kids—states:

“This change can hardly be a surprise, but the sector must hang its head in shame. To take such a wide view of the commission taxation rules could only lead to this kind of reaction from HMRC.”

Another tax adviser from a senior accounting firm said that that amendment

“ratifies what people have thought for a long period of time, which is that it was abusing a tax concession.”

Therefore, there is a consensus for acting. Some concern was expressed, which I think was allayed in discussions with the industry, the ABI and others, that this part of the clause might also apply to ordinary commission reinvestment arrangements in which the adviser agrees to take a lower level of commission in return for the insurer enhancing the investor’s policy. The clause would not apply in those circumstances, nor is it the intention for it to do so.

In ordinary commission reinvestment arrangements of this type, the value of the policy is enhanced, but there is no increase in the premium. Also, the adviser would not have a strict entitlement to the commission that they forgo; they are not rebating any commission to which they would be entitled, and so the clause would not apply. The outcome is that the full amount of premium paid by the policyholder remains allowable in computing any taxable gain, just as it has always been. It would not have to be reduced by the amount of commission that the adviser had forgone and the policy holder would therefore not be taxed on a gain that they have not realised. I hope that that provides a final reassurance on some of those concerns.

The clause also includes the power to change the premium limit and minimum holding period through regulations. That will enable the targeting of the rules to be changed quickly if new schemes are devised in an attempt to side-step the current criteria—for instance, if schemes become economic for premiums below £100,000. I hope that that also reassures the hon. Member for Fareham. A lot of change is happening in the advisory world and a distribution review is being conducted by the Financial Services Authority. There is no desire through this legislation to slow down or impede shifts from commission to fee-based remuneration schemes. It is our intention that ordinary arrangements, and the kind that I have just set out, would apply in this case. Once again, I hope that that gives some reassurance.

The hon. Member for Fareham also asked about the £100,000 de minimis limit. Arguably, people should know the premium levels that they are paying, especially in a situation in which £100,000 or thereabouts is involved. The aim of the measure is to stop the abuse of commission arrangements that offer a tax-free return on investment over a short period, and it is targeted carefully at the type of policy that is used in those arrangement. As I have said, the measure   includes the power to change the premium limit if avoidance schemes become economic for premiums below £100,000.

As I explained, it is not our intention to catch innocent taxpayers who did not take out a policy for avoidance motives but cashed them in early for an unforeseen reason. The clause provides a clear objective test to identify and target the largest short-term policies used in the commission rebate schemes.

I was not quite clear—perhaps that is my fault and not the hon. Gentleman’s—whether the £100,000 limit included all premiums paid by an individual or only those premium-related policies in which the entitlement has been waived.

I will reflect carefully on that.

May I remind my hon. Friend of paragraph 28 of the explanatory notes on the clause, which states:

“Broadly, this measure affects policies where the premiums paid exceed £100,000 in a year and the policy is not held for at least three complete tax years”?

Those explanatory notes; do not you just love them, Mr. Gale? I am grateful to my hon. Friend the Member for Wolverhampton, South-West for taking us back to the notes. I confirm that the answer to the hon. Gentleman’s question is all premiums. I am sure that my right hon. Friend the Paymaster General would want me to give him that reassurance and clarification.

Reaction to the measure has been positive, and the general view is that it is a proportionate and targeted response.

Question put and agreed to.

Clause 28 ordered to stand part of the Bill.

Clause 29 ordered to stand part of the Bill.