McCreevy imposes 20% surcharge on life funds

Personal investment portfolios estimated at £100 million (€127 million) to £120 million have been hit by a 20 per cent penalty surcharge introduced by the Minister for Finance.

According to Mr McCreevy, the move - which takes immediate effect - is intended to prevent the use of life policies as contrived vehicles to secure tax advantages for selected personal assets.

Stockbrokers expressed disappointment at the Minister's decision which will change the tax treatment of "personal portfolio" life assurance policies.

Mr McCreevy announced that he will be providing legislation that will include a 20 per cent surcharge when such policies are being cashed in, whether in whole or in part, effective from yesterday. This is on top of the normal exit tax of 23 per cent, and affects personal investments, mainly held by stockbroking firms.

In a statement, Mr McCreevy said he had been made aware that the new "gross roll-up" tax arrangements for life companies which came into effect in January of this year were being used as so-called "wrappers" for direct personal investments. It is understood that concerns arose about the use of "wrappers" to enhance the tax position of private property portfolios.

The term "gross roll-up" describes life assurance investment funds which are not subject to tax as they accumulate. Traditionally, this had applied only to pensions and, more recently, to insurers selling overseas from the International Financial Services Centre.

Before January 1st, 2001, other life assurance funds paid tax each year and the policyholder had no further tax to pay when he or she received a payment from the policy. Since January 1st, 2001, all new life assurance policies have been written on a gross roll-up basis. No tax is paid by the fund but an exit tax of, currently, 23 per cent is deducted by the insurance company from amounts paid to policyholders.

The main stockbroking firms and the newly formed Anglo Irish Assurance Company moved quickly to offer equity investments to their clients in the "gross roll-up" framework and these products are now "dead in the water", as one stockbroker put it yesterday.

The "equity wrapper" from Davy's stockbrokers was launched in May and had a minimum investment of £25,000. Mr Tom Berrigan of Davy's described it as a popular and convenient way for clients to hold their investments. He criticised what he called the sweeping way in which the change has been introduced.

Mr Berrigan said the material effect on its clients would be negligible because recently, equity investments have not delivered growth to attract any tax. "We already had higher weightings in cash because of the market outlook over the past few months."

Ms Maria O'Connell of Anglo Irish Assurance Company expressed disappointment that there was no industry consultation on this issue.

"We have been at the forefront of developing these personal portfolios and entered into the new market in good faith. We are very concerned that the surcharge is being introduced retrospectively."

Ms O'Connell said the change would not materially affect clients on the equity side but that property portfolios might be seriously affected. "The first properties were only purchased in May and investors would have entered into contracts with the long term in mind," she said.

Anglo Irish Insurance Company is consulting with its advisers and will send its clients a holding letter with a copy of the statement from the Minister for Finance.

Goodbody Stockbrokers also designed an investment product around the "gross roll-up" regime. The minimum investment in the Goodbody product was £100,000 and Mr McGinn said it was fortunate that market conditions suited the unwinding of the product.