A furious row erupted yesterday between life assurance companies and the Treasury over proposed tax changes which could reach back to 1989 and which some companies said could cost them hundreds of millions of pounds - a claim dismissed as "nonsense" by a Revenue and Customs spokesman.

Detailed proposals to tax the reserves of non-profit life companies were published last Thursday by the Treasury without consultation and presented as an anti-avoidance measure.

"We can see no reason for the creation of such reserves on non-profit business except to avoid tax," a Treasury spokesman said claiming the legislation is designed to stop life companies insurers reducing taxable profits or creating artificial losses by shifting funds to their reserves.

The Association of British Insurers called the proposal "another smash and grab on the savings industry".

Legal & General said its UK long term fund containing the reserves of both its with-profit and non-profit life businesses could face a result in a one-off current tax charge in 2005 of up to £500 million under the new international accounting rules.

L&G's chief executive David Prosser 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."