Can anyone just remind me why risk capital tied up in a life insurance company is tax inefficient for shareholders?
My guess is the following - Tied up risk capital will invest in more secure lower yielding assets that generates less "I". If the company is XSI then the lower investment income may mean that the company won't pass the NC1 profit test and have to pay XSE tax? Another possibility is that the company may have to sell other assets to create capital to back the risk and have to realise any capital gains in the original assets in the process?
Maybe it's that an individual would be liable to a lower rate of tax on fixed income investments than an insurer? Any other ideas?
The suggested further reading paper "Current developments in EV reporting" (2005) has a good description of frictional costs in Appendix B (see link at bottom of http://www.sias.org.uk/siaspapers/pastmeetings/view_meeting?id=EmbeddedValue) For tax it says: "B.2.5.8.1 Cost of double taxation Unlike many industries, insurance companies are required to hold significant shareholder assets for long periods. In many countries, including the U.K., it is more tax efficient for investors to hold these assets directly than via the insurance company structure. In the former situation, they only incur tax on the investment return once, whereas, in the latter, they incur tax twice."
