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Replies to Queries -- 3 - Equitable claim

24 January 2001
Issue: 3791 / Categories:
Replies to Queries – 3

Equitable claim
Policyholders in Equitable Life with 'with profits' policies will all lose value. Some will transfer to another fund, losing 10 per cent of their current fund value. Others will lose part of their annual and terminal bonuses from the date the society closed its doors to new business.
Many will incur expense in obtaining professional advice from their registered financial adviser. Is there any way in which, in these exceptional circumstances, such fees could be allowable for taxation purposes?
Replies to Queries – 3

Equitable claim
Policyholders in Equitable Life with 'with profits' policies will all lose value. Some will transfer to another fund, losing 10 per cent of their current fund value. Others will lose part of their annual and terminal bonuses from the date the society closed its doors to new business.
Many will incur expense in obtaining professional advice from their registered financial adviser. Is there any way in which, in these exceptional circumstances, such fees could be allowable for taxation purposes?
(Query T15,742) – Prawn Dimarolo.

Fees spent marshalling pension arrangements are at least partly a cost of establishing the tax liability, or setting the premium payments that affect it and, as ordering the pension aspect is part of the administration of the taxpayer's trade, the fees relate also to that. A taxpayer who is already incurring accountancy and other fees in administering his business and complying with tax law will simply add the reorganisation fees to his existing charge. The charge could well encounter debate, but it is not an open and shut point. At least some is allowable.
However, the expense should not be necessary. The hitch is not nearly as black as the query paints it. Equitable Life still receives premiums on existing policies, still invests them, manages the investments, and realises gains thereon, and investment income still accrues. The only thing it has stopped doing is starting new policies. But the new premiums not received are matched by new entitlements to the capital funds not set up. Nothing is in fact lost, and earnings continue.
As to maturity entitlements, a court decision has varied the formula by which the available fund is allocated to the different types of policy. As a result, some are entitled to more and others to less. The overall pot is the same and, as the case sets a precedent, the same principles govern every other insurer. So Equitable Life keeps its place in the league table of bonuses declared (profitability) of insurances and, on that score, it is worth noting that it has been in the top four consistently for the past century.
Having four different kinds of policy with Equitable Life, I am leaving them precisely where they are, and recommending my clients to follow suit. – Barham.

This problem concerns the classic distinction between holdings of assets as private investor and the same holdings in the possession of an entity granted the privilege of relief from management expenses.
That privilege is granted by section 75, Taxes Act 1988 to an investment company as defined by section 130, that is, any company whose business consists wholly or mainly in the making of investments and the principal part of whose income is derived therefrom. The Inland Revenue Tax Bulletin for October 1995, at page 253, discusses the 1915 origin of the relief in the context of life assurance companies and commercial concerns whose business consisted predominantly of making investments. From a review of meagre case law, the identification of 'business' was thought to be a question of looking at the totality of the company's functions and activities.
Since then, guidance has been available from Cook v Medway Housing Society Ltd [1997] STC 90 which is particularly relevant because the society was not out to make money but to fulfil the social purpose of providing affordable housing. The judge took note of an earlier dictionary definition of functions as 'activities appropriate to any business' and concluded that it was necessary to have regard to the quality, purpose and nature of the company and its activities.
An individual could only obtain relief for the fees mentioned by engaging in a trade of dealing in investments which include Equitable Life policies. – Bear.

Editorial note. It is fairly clear that an employed individual will not be able to make any valid tax claim. 'Barham's' suggestion that relief may be claimable by self-employed policyholders may be optimistic, but should not be discounted.



Issue: 3791 / Categories:
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