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Tax allowance on unit pricing

K

KhoaDNguyen

Keen member
Hi,

In core reading chapter 8 - page 3 states that "it would be expected that more is charged to the linked fund than is paid to HMRC as a company tends to charge w/o explicitly allowing for relief on expenses"

However, the next paragraph states that "for an XSI company, the BLAGAB unit fund will roll up with net of tax investment return, but the company will gain tax relief on its expenses which will reflected in lower charge to policyholder."

I have 2 questions:

1. The 2 underlined part is quite contradicting to me. On one hand it said company tends to charge without explicitly allowing for relief on expenses, on the other hand it said that relief on expense will lower charge. Could you please elaborate this further?

2. How do you get an expense relief on when you are an XSI company?

Thank you.
 
Hi - the distinction is between the first point being about charging to the unit-linked fund and the second about charging directly to the policyholder. The first point is about charging the accrued tax liability directly to the unit-linked funds via the unit prices. For example, if there has been an unrealised gain, then a lower (net of tax) investment return is added to the unit price than if tax had been ignored. But this considers only tax on "I" and not also tax on "-E". The tax benefit received by being able to gain tax relief on expenses may be given back more directly to the policyholder by, say, giving them a higher allocation rate on their premiums than otherwise.

In terms of your second question, an XSI company will by definition be able to gain tax relief on E, since I>E. Did you mean to ask about an XSE company? In that case, the company would need to consider whether it expects to become XSI in the near future (so they will gain relief on carried forward XSE, but it will be delayed) or whether they will remain XSE - in which case they will not be able to gain tax relief for all of their E (and so should not give policyholders the benefit of such relief).

Hope that makes more sense.
 
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