Collateral damage

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I noted almost a year ago about the death of the Maximum Investment Plan. At the time I was particularly delighted that the government was getting to grips with closing off such an obvious tax loophole for the rich and well advised.

However little did I know then that the blunt instrument that the government was about to apply to killing off a richman’s tax break would have profound implications at the other end of the market.

The current draft regulations have been published in the last couple of weeks outlining how HMRC are going to police the new £3600 limit on qualifying policies. They will apply from the 6th of April this year.

So lets be clear about this. There are a new set of regulations about to be enforced in the space of a few weeks and we still haven’t got the final regulations! Now I know that Scottish Friendly are a fast and efficient organisation when it comes to bringing products to market but even we think it’s a bit much to have only a few weeks notice of a new regulatory requirement. I honestly have no idea how some less efficient organisations are going to cope.

But leaving the question of timing aside its the regulations themselves that are causing me a great deal of concern. The regulations (I suspect by accident) include within their scope Tax Exempt Savings Plans from friendly societies which have a £25 a month limit and are exclusive to mutual friendly societies.

These are, by brand and definition, not a rich man’s tax break, they are a true mass market product often designed to get people started on a virtuous long term regular savings habit. However as they are a subset of qualifying endowment polices they are caught by the draft regulations.

The draft regulations will require any applicant to sign an incomprehensible declaration covering whether they are the beneficiaries of any other qualifying life polices (to which the majority of customers will answer “what’s a qualifying life policy”). Additionally they will need to certify that they are not investing more than £3,600 each year into such policies. It sounds fair enough but most customers, in my view, will struggle to accurately answer such a question. The confusion is likely to intimidate a number of customers into not following through on their application.

To actually police the policy, HMRC are requiring clients to provide their NI number, which will bring Tax Exempt Savings Plans into line with ISAs. Whilst I’ve got concerns about this for some categories of clients it does beg the question why HMRC need such a comprehensive declaration when they can easily check the sum total of policies to which a client is a beneficiary through their unique NI number.

So far so difficult enough. However, the regulations, as drafted, go one more step further and require the client to reach a higher level of disclosure than for any other financial product and require the client to provide their Unique Tax Reference (UTR). Cue a chorus of “what now”? Your UTR is another unique reference (I know it’s a oxymoron) used by HMRC, why have one unique reference when you can have two!

You’ll only know your UTR if you’ve ever completed a self assessment form and even then like me you’ll need to wade through several drawers of junk and papers to find it. Mine was underneath the drawer with all the polythene bags in it! So very few people know their UTR and those that do will struggle to find it.

In my view the majority of clients faced with the requirement to find or just understand the concept of a UTR will respond with a shrug of the shoulders and say “why bother”. Thanks to HMRC apathy has just been given a huge boost.

As I said a year ago I’ll not miss maximum investment plans and was delighted when the government took action to rule them out. But their “drone strike” solution will create a huge amount of collateral damage amongst the very people that the government is desperate to encourage to start fending for themselves and engaging with the financial services industry.

This policy is poorly timed, ill thought out and being exceptionally badly communicated. Was I naive to have expected more?

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 Advisers may charge for providing such advice and should confirm any cost beforehand.