Life Assurance and Taxation
LIFE assurance is a specially favoured means of savings, thanks to the rebate of income-tax which is allowed on the premiums. How great is this favour is perhaps not fully realised by the majority of people v,-ho want to save money with security and profit. Broadly speaking, and subject to :ertain qualifications which do not affect many of the people who take out life policies, the allowance in respect of income- tax on life-assurance premiums means that out of every pound handed over to an insurance company, 2S. 9d. is paid with money that otherwise would have to go to the tax-collector. Let us see what this means in the case of a man who is approaching his thirtieth birthday, and wants to receive t,000 in 25 years time. The premium quoted by first- class British life offices for a simple nou-profit policy for this amount will be about £35, or perhaps less. Now if the individual saved this money, and invested it, he would have to invest it at per cent., free of tax, say, 141 per cent. gross, to amount to £i,000 at the end of the time. But his premiums will have cost him only £30 4s., thanks to the rebate, and the investment of this sum in the policy will have yielded 21 per cent. compound interest, free of tax, equivalent to investing his money at very nearly 3 per cent. gross. If he were to take out a with-profits policy, which would increase through the addition of annual bonuses, the result would be quite spectacular, even taking into account the pos- sibility that bonus rates in general may have to be reduced owing to the difficulty the offices are facing in the investment of their money at such high rates as they have enjoyed until the last few years, and also the higher Income Tax they arc having to pay on their investment income. Allowing for these factors, there is still every prospect that about 5', per cent. gross will be realised by investing in with-profits endowments-assurance policies, and over the whole period of course, the dependants of the policyholder will have had the protection of the policy for its full amount, right from the payment of the first premium.
LIFE ASSURANCE COSTS NOTHING
It is not too much to say therefore that life assurance costs nothing, because it furnishes such a fine vehicle of saving. Why then should the legislature specially favour this form of saving when other channels of thrift, except perhaps the National Savings Certificates, in limited degree, enjoy no such official encouragement ? The question is quite a natural one, yet there is no very convincing answer, except to say that it lies in the distant past, when life policies were nearly always taken out for the whole of life, so that they repre- sented a form of thrift from which the saver obtained no per- sonal advantage. In those days the rebate of tax amounted to the full tax on. the premiums ; but then the rate of tax up to 1914 had never been more than is. 3d. Hence, half the rate today, at 2S. 9d., is a much greater concession than was the full rate in pre-War days.
It was not until 1916 that any change was made in the rebate. Then it was restricted to one-half the standard rate, with certain qualifications which were introduced with the idea of preventing life assurance from being used as a mere channel of tax-evasion. It was provided, for instance, that the policy must assure a sum payable at death; it did not matter whether it also provided that the sum should be payable if the life reached a certain age, or included other benefits. The sole restriction was on the amount of premium in relation to the death benefit. If the premium exceeded 7 per cent. on that benefit, then rebate of tax would only be given up to 7 per cent. This provision was intended to rule out the very short-term endowment-assurance policy, but even ten-year non-profit endowment-assurance policies will generally be eligible for the full rebate, except at fairly advanced ages. The regulation, in fact, penalises age much more than shortness of the term, because the premiums natur- ally are higher if the effecting of the policy is left until late in life.
IF THE TAX-REBATE IS REDUCED
With the increase in the rate of income tax in the last few years, the value of the rebate has increased, and it seems not at all unlikely that the Chancellor of the Exchequer, in looking round for fresh sources of revenue, or for means of enlarging the yield from existing sources, may cast nis eyes once more on the quite important hole that the rebate makes in the yield of income tax. If he should do so, however, it seems improbable that the rebate will be withheld entirely. It has become so firmly established that to abolish it alto- gether would be almost akin to withholding the allowance for house-repairs under Schedule A assessments. Some scaling down or revision of the rules is within the bounds of possibility; but even if this occurs, there is a notable prece- dent in the changes made in 1916, which should console those who realise the value of the rebate in its present form. This precedent is that the reduction of rebate was not made retrospective, at any rate to the larger income-tax payers, for the people who possess policies taken out before 1916 still enjoy the full rebate of 5s. 6d. in the pound on their premiums, provided their incomes are big enough. There is therefore a case for continuing the half-rate rebate on exist- ing policies, should the regulations be changed, and this constitutes an argument for effecting a policy now, and not waiting until the Budget comes along, for the attractions of life assurance may not be quite so great if the rebate is cut down.
So far we have considered the effect of taxation on the savings side of life assurance. Now let us see where it comes in as regards benefits. The sum assured under a life policy is of course a capital sum, and therefore not liable to income tax, nor is it at all likely ever to be taxed unless under some form of general capital levy, in which case a life policy would be no worse than any other form of investment and might be a great deal better. But most people want to assure either to themselves or to their dependants a regular income, rather than a capital sum, and of late years, appreciating this requirement, the life offices have introduced varying forms of " income policies." These as a rule provide the dependants with regular annual sums up to a certain date after the effecting of the policy. Later improvements on this form of policy make the annual sums payable for a definite number of years, usually twenty years, and they can be taken out to furnish this income to the policy-holder for the twenty years after he attains a certain age, or his dependants if he should die. These payments are entirely free of income tax because from the company's point of view, they are not annual payments but instalments of a capital sum, doled out over the period. To the recipient, of course, they look like income, and can be treated as such. The Inland Revenue so far has adopted the companies' point of view, and regards the payments as portions of a capital sum, and does not tax them. The companies are careful to say in their literature regarding such policies that the income payments " are not liable to income tax under present Inland Revenue practice." This may sound a trifle ominous, as implying that the Inland Revenue authorities might change their practice at any time and tax the payments as income. In actual fact the holder of this type of policy need have no qualms on the subject. Even were the authorities to change their practice, the cash- value of such a policy, once the payments had started, would be the full present value of them. They could be taken in cash, banked or invested, and drawn on over the income period. It would make little or no difference, for the scheme is not in any sense a " tax-evading scheme," like the " single premium and loan " plans that caused special legislation to be inserted in the Finance Act of a few years ago to stop them, and incidentally caused a good deal of heart-burning among the policy-holders of the offices that had made a special feature of them.
No CASE FOR INTERFERENCE The present day " income-policy " is a very valuable and useful means of providing for dependants or for advanced years without having to contemplate investment problems, and there is certainly no case for interfering with it on tax grounds, even if interference could be made effective.
While the income payments are tax-free, because they are capital, they are, of course, excluded from the computation of any additional incline which may be taxable, so that they do not contribute to the raising of the rate of tax on such income, if it is taxable at less than the standard rate.
There is a useful extension of this income type of policy whereby the income is assured for the whole of the remainder of life, and of the life of the assured's widow, should he leave one, so relieving later years of all anxiety. The payments which fall to be made after the expiry of the fixed term, how- ever, are not exempt from tax, for they are in the nature of an ordinary annuity, and therefore must be treated as income. In most cases, however, the tax-free income runs for a period of twenty years, so that if it starts at the age of 6o it goes on until the policy-holder is 8o years of age and is only liable to tax after that age. This is a prospect which will satisfy