When a tax break dies

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The Budget is a funny moment for anyone in the financial services industry. There’s all the parliamentary banter and pantomime or the BBC versus Sky News teams having their “cup final” moment, and sounding a bit too much like David Mitchell on football for my liking.

If you work in financial services you ignore all the artificial sound and fury, and spend hours looking at all the detail. You are looking for opportunities for new products, or more likely to see what headaches you are going to have in a few hours as you start to think about reconfiguring your IT system, customer service process or marketing plans.

One technical nicety that emerged (it was too boring for Osborne to mention in the House) is what the trade press are calling the death of MIPs. Maximum Investment Plans have had a checkered history, covering high charges, mis-selling, and various tax planning strategies depending on the tax free alternatives.

They operated as qualifying endowment plans which is the technical jargon for an investment issued by a life company (this one for example). The organisation accepts regular payments from the customer and the tax is paid by the provider (the cost of which is passed on to the client).

The advantage is that, provided they keep the plan for long enough (usually at least 7 and a half years) they have no tax to pay on any gains, even if they are a higher or basic rate taxpayer. So it can often be better for the tax to be paid by the provider rather than the individual. Of course it all depends on individual circumstances as to whether they were better off.

A condition of the tax break is that the provider also has to package the product with some life cover. So the industry came up with the idea of creating a suite of such products with the minimum amount of life cover. In a blaze of marketing brilliance (yes an example of the lowest form of wit) the industry turned minimum on its head; if there was less for life cover there was the maximum for investment. Hence Maximum Investment Plan.

However as we know tax treatment can change in the future and MIPs began to fade as a mainstream product in the era of TESSAs, PEPs, ISAs and pensions.

But since 2008 MIP started to get mentioned in hushed tones throughout the industry, indeed I was tapped up by a couple of consultants asking if Scottish Friendly would be able to build a MIP for their clients. There were two main reasons behind this: rising tax rates and squeeze on pensions for people with big incomes. It was almost comical how the industry hoped to quietly reinvent this tax break for rich individuals whilst hoping the government wouldn’t notice.

It was interesting to watch the ABI new business statistics which showed a pulse in the once moribund MIP business line, start to blip, blip, blip back into life.

But today the government effectively made MIPs as a rich man’s tax break redundant, and I for one welcome it. In my view high net worth individuals don’t need any more tax breaks to encourage them to invest. Tax breaks should be small, simple and focussed on getting those that don’t normally invest to get into a regular habit. Once that habit takes hold, tax breaks become much less relevant and their job is done.

So farewell MIPs, it’s been nice having you around but your time as a tax loophole for the rich is happily at an end.

No advice has been provided by Scottish Friendly. If you are in any doubt as to whether a savings or investment plan is suitable for you, you should contact a financial adviser for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting www.unbiased.co.uk. Advisers may charge for providing such advice and should confirm any cost beforehand.