X2.1 Comparing tax basis

[DevikaG]

X2.1 looks at comparing the BLAGAB tax basis for unit linked business with a new proposed tax basis (tax on premium income at uniform rate of k%).

The solution for 'Investment' states that:

This current taxation approach favours equities and property with high capital growth, eg due to the deferral of tax payment on capital gains.
Under the proposed regime, both income and gains will be tax-free.
This means that it may be desirable to adopt a different investment strategy for the non-unit component of the liabilities that will need to be set up for new business.
It might also lead to a different investment strategy in any managed unit-linked funds, eg less equity and more bond investment.

My question is, if the new taxation basis does not tax on income and gains, would it not be beneficial to have more investments in equities and properties? Why does the solution state otherwise for both unit and non-unit fund investment strategy?

 

[Lynn Birchall]

The current tax system in the question potentially tips the choice between equities / property / bonds towards equities / property because of the deferral of tax until when gains on these assets are realised.

In the proposed new tax system, there is no difference in the treatment of investment returns between equities / property / bonds. So, there may be a shift towards bond investment (now that equities and property lose their 'relative' advantage).

Not paying tax on income and gains may appear to make equities and property investment more attractive, but that ignores the fact that it also makes bond investment more attractive too.

Hope this helps