UK insurer, Legal & General on Wednesday joined the chorus of condemnation regarding a tax measure quietly introduced by the Treasury last week.
Under the new regulation, contained in draft anti-avoidance legislation published on Thursday, life insurers will be prevented from holding capital in their reserves in order to reduce taxable profits or create artificial losses.
In a statement, Legal & General observed that:
"The scope and full impact of the draft legislation is materially unclear. However, if the proposed legislation were enacted and were to apply to the accumulated non-profit reserves in our UK Long Term Fund, then we estimate the additional tax charge which could be reflected in our European Embedded Value accounts could be of the order of £200 million."
"Our European Embedded Value accounts already assume the tax effect of distributing reserves over a period. Our International Financial Reporting Standards (IFRS) accounts do not make such an assumption. Accordingly, the potential impact of the draft legislation on our IFRS accounts would be larger and, in 2005, could result in a one-off current tax charge of an amount up to of the order of £500 million."
Sir David Prosser, Legal & General Group Chief Executive, commented:
"This draft legislation has been published without any consultation. The Government is proposing retrospective taxation on reserves which provide security for this industry’s customers. Our accumulated reserves have been built up over many years and include funds which have already been taxed."
"It is our understanding that the industry will be lobbying strongly to have this draft legislation withdrawn or amended. Legal & General will fully support such measures."
L&G, in conjunction with the Association of British Insurers and rival firms including Prudential, Aviva, and Friends Provident is expected to argue that strong reserves are essential to the financial stability of an insurance firm.
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