Prior to the Budget in November 2017, individuals with money invested through insurance companies benefited from a tax break which meant that any investment growth that simply kept pace with inflation was not subject to tax. However, the Chancellor announced that this ‘indexation allowance’ would no longer apply from January 2018. 

This measure changes the calculation of indexation allowance so that for disposals of assets on or after 1 January 2018, indexation allowance will be calculated using the retail price index or factor for December 2017, irrespective of the date of disposal of the asset.

Without this measure, indexation allowance would be calculated up to the month in which the disposal of the asset occurs.

Legislation will be introduced in Finance Bill 2017-18 to implement the measure. At the time, the HMRC policy document stated it would have ‘no impact on individuals or households as it only affects companies’, and was set to bring in £525m annually by 2022/23.

As soon as the measure was announced, Royal London drew attention to the fact that more than three million of its policy holders would face increased tax on their policies as a result of the change, and it is estimated that more than 11 million people in total will lose out to the tune of around £250m.

Now Royal London has obtained a copy of a standard letter being issued by the Treasury to members of the public who write in to complain about the change which the insurer says, admits that there will be an impact on individual savers.  

The letter says: ‘…the impact passed on to individual policy holders is likely to be small’, although Royal London says the Treasury offers no evidence for this assertion. This directly contradicts the continued assertion that there is ‘no impact’ on individuals or households.

As the measure is contained in the Finance Bill which is still under consideration by MPs, the insurer is now calling for Parliament to revisit this measure in the light of this new information and the impact on millions of small savers, the large majority of whom are basic rate taxpayers.

Steve Webb, director of policy at Royal London, said: ‘MPs have clearly been misled by the information which the Treasury has put out on this issue. Far from having “no impact” on households, this stealth tax will hurt around 11m savers.  

‘If MPs had been told this from day one there would have been much more opposition to this measure. There is still time for Parliament to scrutinise this new tax and stand up for small savers up and down the country.’

Corporation Tax: removal of capital gains indexation allowance from 1 January 2018 is here.

Report by Pat Sweet