The change was announced this week by the new Conservative-Liberal coalition government, and forms part of an upcoming package of measures designed to raise taxes and cut spending in order to reduce the budget deficit.
A side-effect is that mutual funds, among other forms of investment, will now receive the same tax treatment as on and offshore insurance bonds, 40%.
It has been forecast that large sums will soon begin to flow out of mutual funds to take advantage of the lower CGT rate before it rises and into other tax-efficient wrappers such as offshore bonds.
Boost for bonds
Neil Chadwick, technical marketing manager for Isle of Man-based life company Royal London 360°, said: “Many advisers have been discounting offshore bonds for a few years now, purely on the disparity between the higher rate of income tax and that of CGT. This is despite tax being only one of many factors that must be considered before recommending a suitable investment structure.
“On the assumption that there are no further, surprise increases in income tax rates then this is good news for the offshore industry.”
CGT was lowered from 40% in 2008 Budget, which at that time was also the top rate of income tax.
The move caused a storm of protest from the on and offshore life industry, whose insurance bond products are taxed on an income basis. They claimed the change would hand an unfair advantage to other investment products, primarily mutual funds, which in most cases are taxed on capital gains.
Failed lobbying
The Association of British Insurers (ABI) and Association of International Life Offices (Ailo) lobbied the treasury not to proceed with the plan, announced in the Pre-Budget Report of October 2007, claiming it would do huge damage to their industries, but were unsuccessful.
The subsequent reduction in CGT did indeed result in the collapse of the onshore bond market and a less severe, though significant downturn in offshore bond sales into the UK. Mutual funds, meanwhile, saw a rise in new money.
Mutual fund sell-off
Margaret Jago, technical manager for Dublin-based Aegon International, said an influx of money into offshore bonds could come very soon as investors sell capital assets.
“We anticipate that investors currently holding collectives will seek to realise gains in the period running up to the Budget to take advantage of the current 18% CGT rate. This is likely to cause a significant amount to become available for investment in the next four to six weeks, and could cause a spike in new business figures for other types of investments such as offshore bonds.”
Gerry Brown, head of trusts and taxation for Prudential International, was more circumspect in his analysis, noting it would be wise to wait until the publication of the Finance Bill before making any predictions.
However, he added: “A substantial increase in the CGT rate would increase the attractiveness of offshore bonds in relation to "CGT investments" particularly OEICs/unit trusts.”
Mark Green, head of tax and estate planning for Legal & General International, added: "The increase in the rate of CGT will re-kindle the debate between investment bonds and collectives. The more aligned CGT rates become with income tax rates (possibly including the new 50% rate) the more
investors will find bonds (both offshore and onshore) increasingly attractive."
