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Tax Increases effective 4 January 2011
4th January 2011

Further to our news item dated June 2010, the tax changes announced by the Chancellor of the Exchequer in his 2010 Emergency Budget subsequently became law under the Finance Act.

As a result, with effect from today, 4 January 2011, the standard rate of Insurance Premium Tax (IPT) will rise from 5% to 6%, and the higher rate from 17.5% to 20%. The standard rate applies to the vast majority of general insurance policies including property and motor, whilst the higher rate applies to travel insurance and extended warranties on vehicles and appliances.

The new rates of IPT apply to all policies incepted or renewed on or after 4 January 2011. For policies that incepted or renewed before this date, mid term adjustments involving additional premiums will attract the new rate of IPT, but mid term adjustments with a return premium will attract the same rate of IPT as originally charged.

The standard rate of VAT has also increased on 4 January 2011, from 17.5% to 20%. From an insurance perspective, all policies where Engineering Inspection Services are provided will be affected by this change. In addition, the new VAT rate raises the potential for underinsurance (i.e. inadequate sums insured) for non-VAT registered customers.

To illustrate this underinsurance risk, let's take an office block, which has been professionally re-valued by a RICS surveyor, with a rebuilding cost of £20 million. RICS surveyors normally calculate valuations without an allowance for VAT, as they won't know the VAT status of their clients. If the property owner is not VAT registered, they must include an allowance for this tax in the sum insured.

Therefore, prior to 4 January 2011, the sum insured would have been £23.5 million (£20m plus 17.5% VAT). However, after 4 January 2011 the sum insured should be £24 million (£20m plus 20% VAT, excluding any provision for inflation). In other words, the sum insured figure for full reinstatement of the office block has increased by 2.1%. If the sum insured is not adjusted and a loss occurs, the 2.1% shortfall might well be taken into account in the insurer's Average calculation (please see Issue 1 of our Realty Review newsletter for an explanation of Average) and the claim payment proportionately reduced.

We are pleased to advise that Realty has mitigated this risk of underinsurance for many of our clients by negotiating a VAT clause in the majority of our policy wordings so that our customers do not have to include VAT in their sums insured, even if they are non-VAT registered.

Realty Insurances Limited is an independent intermediary, authorised and regulated by the Financial Conduct Authority (FCA).
You can check these details on the Financial Services Register by visiting the FCA's Website or by
contacting the FCA on 0800 111 6768. Our FCA register number is 307515.

Registered Office: 58 Davies Street, London W1K 5JF. Registered in England No. 482966.
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