The loophole came about when the government introduced a new 'gross roll-up' policy in January this year which does not tax life assurance investment funds as they accumulate but instead levies an exit tax when the policies come to maturity or are cashed in. But the Irish Revenue soon realised that Ireland's life assurance companies, banks and stockbrokers have been retailing personal investment portfolios, known as wrappers, to wealthy clients for some time and the products were increasingly being used to escape restrictions on tax relief for loans on residential properties.

In a statement released by the Finance Department this week, Mr McCreevy said that there was no element of a 'collective' investment in these products; in essence the life policy is merely a contrived vehicle to secure gross roll-up tax advantages for selected personal assets.

The Minister added that the special tax treatment afforded to life insurance investment was based on the idea of collective funds and pooled investments using the professional management expertise of the life companies. It was never intended that the same beneficial tax treatment would apply to purely personal direct investments using life policies as a wrapper.

The revised legislation is effective immediately and closes the tax loophole by imposing a 20 per cent surcharge to apply on top of the usual exit tax of 23 per cent when the policies are cashed in, whether in whole or in part. It also applies to personal portfolio policies taken out by Irish residents with companies in an EU or EEA State, or in an OECD country with which Ireland has a tax treaty.