Here’s unexpected news. Simon Nixon and I agree on something: we both rather approve of Alistair Darling’s changes to the capital gains tax. You can read my views on it in detail here (The truth about the IHT rule changes) and in Simon’s City View, but the basic point is that simple is good and the new system (everyone pays 18% on all gains from April) is nothing if not simple. The fact that so much protest has been raised against the change – to the extent that most commentators appear to believe poor Darling is going to have to back down – tells us nothing about its worth as a policy and a great deal about the power of special interest groups and their ability to make things that upset them sound like they should upset us all.
Take the fuss from the life insurance industry about the way a flat 18% tax will cause a collapse in the sale of their insurance bonds. “If this is not sorted out,” one insider told The Independent on Sunday, “sections of the life insurance industry could be killed off.” This might be true. People only ever bought these products because of a quirk in the system that treats returns from various insurance bonds not as capital gains, but as income. The key benefit here was for higher-rate taxpayers: if they could roll the gains up until they retired and became lower-rate payers, they could slash their effective tax rate to a mere 20%. However, now they can pay only 18% on ordinary funds they are unlikely to bother. Clearly, this is bad news for insurance companies.
However, it is no reason whatsoever for the rest of us to be remotely upset. I don’t suppose all of these bonds are totally rubbish products, but without the attached tax breaks there don’t appear to be any worth investing in – particularly once you note that the insurance companies pay commissions of 6%-7% of the amount you invest to the IFAs who flog them. “This is a hugely complex issue,” said a spokesperson for Prudential. But it isn’t. It’s actually very simple. Most of these bonds are overpriced, fairly substandard and unnecessarily complicated products that exist purely because of an inconsistency in the tax code. Why should Darling be bullied into giving them a reprieve? From the consumer’s point of view, surely the sooner they are killed off and the investment universe becomes a simpler place, the better.
Something else I’m not sure I understand the point of is the new Master Liquidity Enhancement Conduit (or M-LEC, to give it its equally stupid short name), to be set up by Citibank, JP Morgan and Bank of America to buy mortgage-backed securities. This looks like a bail-out fund – a way for the banks to move bad assets around the place at artificially high prices in order not to have to take them on to their own balance sheets. The banks swear this isn’t the case (the fund will be “conducted purely on market terms”), but if that really is the case, says Jonathan Allum of KBC, surely it rather raises the question of “why such a fund is needed in the first place”. Very confusing.