I don't follow the tax position being described. I would have understood that because the company is not getting tax relief on E, the company is due tax on I instead of I - E. Because the Ph is getting gross investment return paid tax free I would assume the company wouldn't pay tax on the I (I know this is an assumption) so basically the company is not paying tax on these new policies either. I don't follow the "gross I - E" described in the solution? The solution also states "the former is more important as this is an XSI contract"? I understand it is an XSI contract but don't follow what it is comparing? I don't get why the product would be more attractive to higher rate taxpayers as I thought these products were independent of the type of taxpayer or does the solution just mean that not paying tax on this new policy type would be relatively more valuable to a higher rate taxpayer compared to alternative investments? Other things on this question - having read it I would have interpretted it as a tax question but only 2 out of the 15 marks on the solution are regarding tax - the solution interprets it as a new policy type launch question? The solution doesn't go into the effect of the tax figures of the company under the old and the new policies which I would have thought was the most important point? It expects us to "invent" policy features of the new policy type that weren't given in the question. It's a simple policy - if the new type doesn't describe a feature I'm not going to go making stuff up - isn't the whole point of these stakeholder type policies to make them as simple as possible but the solution goes into adding more complex features not mentioned in the question.
No. As you go on to say, the gross investment return being passed onto the p/h means there is no tax on this. So it's a tax-free product I agree that 'taxed on a "gross I-E" basis' is not very clear wording. It means I is received gross (so no tax) and E is incurred gross (so no tax relief). It's comparing I and E. I is bigger for XSI contracts, so not paying tax on I is more significant than losing tax relief on E. Higher-rate taxpayers would have had a liability to further tax on the proceeds for a non-qualifying policy like this one. The new rules say proceeds are tax-free, which makes a big difference to such p/h's. Tax is just one aspect of running an insurer and is taken into account when designing products. The question asks for a discussion of options open to it in light of this initiative, which is an invitation to explore beyond what's given, eg how can we maximise sales of this, what design features would make it more attractive etc. This is all part of demonstrating the higher-level skills that the examiners are looking for.
Ok - thanks for that I think I have a tendency to pigeon hole questions where they mention tax as tax questions when they're more than likely a company question with tax just being part of the jigsaw and consequently only part of the solution - I'll leave the blinkers off from now
