1 1 Legitimate Tax-Saving
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INSURANCE PRIVILEGES.:
irIIE heavily-burdened income-tax payer of today probably .d'oes not realize the extent to which he may lighten the iteal, '.burden of taxation; either to 'himself, '' or to his ependants, by making a quite legitimate use a the oneessions which the law or the Inland Revenue Eiltuthorities allow in. connexion with life assurance. ' !' The ordinary man, having heard perhaps of the dire results of the exploiting of the "single premium and loan" polieies of a few years 'ago, may be inclined to look askance at any suggestion of what he may be inclined to term "tax evasion." But there is a vast ,difference between schemes which set out deliberately to vade taxation and the mere acceptance of those con- 'Cessions which the legislature has considered; it right to inake in the interests of thrift, by the granting of rebates i ne otherwise. I The great majority of the leading insurance companies have set their faces against schemes whose chief attraction is the avoidance of liability to income-tax or surtax, being fearful lest in any attempt to defeat such plans the Inland Revenue authorities should whittle down the reliefs whith are given to the individual whose jirimary object is to obtain insurance, but quite reasonably 'Wishes to secure all the advantages he can, , TAX-EVADING.
If any scheme becomes too obviously a mere plan for vading taxes it will sooner or later be checkmated by legislation, as was the case with the single-premium and loan policies which were so popular before 1930. These were chiefly attractive to the surtax payer, who borrowed the single premium, or practically, all of it, from the insurance company on the security of the policy, and paid interest on it. Such interest was then. a charge against income, allowable for tax, with consequent relief from full income-tax and surtax on it. Such policies could be taken out in the form of short-term endowment assur- ances, or even of sinking fund policies,' where no element of life assurance entered into the contract. The pay- ment of the policy money, less the loan, at the end of the time, which might be as short as five years, repre- sented a very high rate of interest on the original sum put down, namely, the difference between the amount of the, single premium and the loan which the company would grant upon it. Then the Finance Act of 1930 came along with its disallowance of such interest as a charge' against income for 'taxation purposes, and many such policies were surrendered, even at a loss to the holders.
The history of that episode is quoted partly as a warning, but also in order to point out the somewhat illusory character of the high rate Of interest purporting to be' given by such contracts. The rate was only high because the actual capital was small. It is still open to the surtax payer, and the income-tax payer, to make use of the same principle, and to save the same amount of tax, quite legitimately, provided lie has a capital sum available to pay the premium, instead of having to borrow it. . . .
For thc ,assumption- is that such capital sum will be earning interest, and therefore attracting liability to income-tax and surtax., But if the individual sells, the securities he' thereby discontinues the income altogether, aad it is no longer taxable, perhaps bringing him into a lower category for surtax on the rest of his income.
Tax-SavrNq.
There is no law taxing appreciation in non-interest- bearing securities, and it is not easy to see how one could be devised UlilesiIll forms of capital increment should be taxed. The great obstacle to the adoption of. such a principle is that capital depreciation would also have to be allowed, and the loss to the revenue might be greater than the gain. The United States has tried this system and discovered its disadvantages. The saving of tax by putting income-producing capital into a single premium policy is of course substantially greater than if such income is used to pay annual prem- iums an a policy, for stich annual premiums are merely' eligible for rebate at one-half the standard rate, whereas the extinction of the income saves the whole amount of income tax and surtax on it.
It is sometimes contended that what the individual saves in this *ay in annual taxation he loses in death duties on enlarged 'capital, and if the fact of insuranee prevents the dissipation of the capital, this may be true. But in the ordinary way increased liability in respect Of death duties will only arise in respect of the addition to the capital produced by the insurance policy over and above the ,single premium invested in it, and as dea4 duties do not exceed 50 per cent., even on the larged estates, there must always be a substantial. gain to the estate on balance.
CONSERVING SAVINGS.
It is not everyone, however, who wants to save surtaS by means of insurance, The ordinary man is more Con- cerned with the conservation of his savings for his latex years. The common endowment assurance policy mor doubtedly offers the best channel in this respect, especially when the saving of income tax, first on the annual pre, miums, and then on the capital, is taken into account', For, ordinarily, the annual premiums on an endowment assurance policy, payable in say from ten to twenty years time, will provide a direct rebate of income tax of one- half the standard rate on the amount of the premium payments. Then, as compared with the accumulation of savings by means of investment, there' is the saving 'in respect of the absence of any annual income, so that the amount of the policy, when paid at maturity, repre- sents a very handsome rate of accumulation of the premium payments, especially if the endowment assuranee is for a relatively short term, so that the office has not been exposed to much risk, in respect of death 'claims., The equivalent of an investment of the premiums at Compound interest of nearly 44 per cent. can be secured today even from non-profit endowment assurances for Say, fifteen years, and on with-profits contracts, bonuses are maintained, the results are even better.
TAX-FREE BENEFITS.
Another very valuable privilege in connexion with life assurance contracts is the ability to treat benefits which are paid by instalments, even though they are regarded as income by the recipient. For instance, ifr the case of the popular "family income policies " where part of the benefit consists of annual payments to widoW Or other dependant; after the death of the life assured, such payments are free from income-tax liability. Alsd, Under policies which are known as " educationli endowments " because they provide for a definite annual sum for a fixed term of years? .the payments are not liable to income-tax, although applied to purposea which -Otherwise would have to be met from taxabth income.' For, in effect, the payments are merely instal- ments of a capital SUM, paid out over a period for the convenience of the assured. The income-tax authorities too, cannot very well change their attitude towards' such payments and try to tax them, for the assured Could 'merely commute the payments for .a cash sum and draw upon the capital as required.' Such policies offer a very valuable means of augmenting, pension payments due to commence at a certain age, or even of anticipating them, by covering an intervening period. If effected at the right time they may enable a substantially larger annuity to be purchased at a later date, when the policy benefits, have ceased, for ordinary annuities are taxable in full in the hands of persons liable to income-tax, even though part of the payments 'wily represent a drawing upon capital. A. W. WRIGHT, ,
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