Finance Act 1996

Application of surplus in reduction of certain losses

5After section 83 of the [1989 c. 26.] Finance Act 1989 there shall be inserted—

“83AAAmounts added to long term business fund of a company in excess of that company’s loss

(1)If one or more relevant amounts are brought into account for a period of account of a company and either—

(a)the aggregate of those amounts exceeds the loss which, after the making of any reduction under subsection (6) below but before any application of section 83(3) above in relation to that period, would have arisen to the company in that period in respect of its life assurance business, or

(b)no such loss would have so arisen,

the surplus for that period shall be applied in accordance with the following provisions of this section and section 83AB below.

(2)In this section—

• “relevant amount” means so much of any amount which is added to the long term business fund of a company as mentioned in subsection (3) of section 83 above as does not fall within any of the paragraphs of subsection (4) of that section;

• “surplus”, in relation to a period of account of a company, means (subject to section 83AB(2) below)—

  (a)

  if the aggregate of the relevant amounts brought into account for that period exceeds the amount of any loss which, after the making of any reduction under subsection (6) below but before any application of section 83(3) above in relation to that period, would have arisen to the company in that period in respect of its life assurance business, the amount of the excess; or

  (b)

  if no such loss would have so arisen, the aggregate of the relevant amounts brought into account for that period.

(3)Where, apart from section 83AB(2) below, there is a surplus for a period of account of a company for which there are brought into account one or more relevant amounts which were added to the company’s long term business fund as part of, or in connection with, a particular transfer of business, the appropriate portion of the surplus for that period shall be treated as reducing (but not below nil) so much of any loss arising to the transferor company in the relevant accounting period as, on a just and reasonable apportionment of the loss, is referable to the business which is the subject of that particular transfer.

(4)For the purposes of subsection (3) above, the appropriate portion of the surplus for a period of account of a company is, in the case of any particular transfer of business, the amount which bears to that surplus (apart from any additions by virtue of section 83AB(2) below) the proportion which A bears to B, where—

• A is the aggregate of such of the relevant amounts added to the company’s long term business fund as part of, or in connection with, that particular transfer of business as are brought into account for that period, and

• B is the aggregate of the relevant amounts brought into account for that period.

(5)Any reduction pursuant to subsection (3) above of the loss arising to the transferor company in the relevant accounting period shall be made after—

(a)the making of any reduction under subsection (6) below, and

(b)any application of section 83(3) above,

in relation to the period of account of that company in which falls the date of the particular transfer of business in question.

(6)Any loss arising to a company in respect of its life assurance business in a period of account subsequent to one for which there is a surplus shall be reduced (but not below nil) by so much of that surplus as cannot be applied—

(a)under subsection (3) above;

(b)under this subsection, in the reduction of a loss arising to the company in an earlier period of account; or

(c)under section 83AB below, in relation to a transfer of business from the company in that or any earlier period of account.

(7)Any reduction pursuant to subsection (6) above of a loss arising to a company in a period of account shall be made—

(a)before any application of section 83(3) above in relation to that period, and

(b)if the company is also the transferor company in relation to a particular transfer of business, before the making of any reduction under subsection (3) above in relation to that one of its accounting periods which is the relevant accounting period in relation to that transfer.

(8)A surplus in respect of an earlier period of account shall be applied under subsection (6) above before a surplus in respect of a later period of account.

(9)All such adjustments to the liability to tax of any person shall be made, whether by assessment or otherwise, as may be required to give effect to this section.

(10)In this section—

• “add” has the same meaning as in section 83 above;

• “the relevant accounting period” means the accounting period of the transferor company which—

  (a)

  ends on the date of the transfer of business mentioned in subsection (3) above, or

  (b)

  if that transfer of business falls within section 83(6)(c) above and no accounting period of the transferor company ends on that date, ends next after that date;

• “transfer of business” has the same meaning as in section 83(3) above;

• “the transferor company” means the company from which the transfer of business mentioned in subsection (3) above is effected.

(11)A transfer of business falling within section 83(6)(c) above shall be treated for the purposes of this section as a transfer of business from the company which is the reinsured under the contract of reinsurance.

83ABTreatment of surplus where there is a subsequent transfer of business from the company etc

(1)If an amount is added to the long term business fund of a company as part of or in connection with a transfer of business to the company, or a demutualisation of the company not involving a transfer of business, and—

(a)there is a surplus for the period of account of the company for which that amount is brought into account,

(b)at any time after the transfer of business or demutualisation, there is a transfer of business from the company (the “subsequent transfer”), and

(c)at the end of the relevant period of account there remains at least some of the surplus mentioned in paragraph (a) above which cannot be applied—

(i)under subsection (3) of section 83AA above,

(ii)under subsection (6) of that section, in the reduction of a loss arising to the company in an earlier period of account, or

(iii)under this section, in relation to an earlier subsequent transfer,

so much of the surplus falling within paragraph (c) above as, on a just and reasonable apportionment, is referable to business which is the subject of the subsequent transfer shall be applied under this section.

(2)An amount of surplus which is to be applied under this section shall be so applied by being treated as an amount of surplus (additional to any other amounts of surplus) for the period of account of the transferee company which last precedes the period of account of that company in which the subsequent transfer is effected, whether or not there is in fact any such preceding period of account.

(3)If, in a case where an amount is treated under subsection (2) above as an amount of surplus for a period of account of a company, the period is not one for which there is brought into account an amount added to the company’s long term business fund in connection with the subsequent transfer, subsection (1) above shall have effect in relation to any transfer of business from the company subsequent to that transfer as if an amount had been so added and had been brought into account for that period.

(4)Any question as to what is a just and reasonable apportionment in any case for the purposes of subsection (1) above shall be determined by the Special Commissioners who shall determine the question in the same manner as they determine appeals; but any person affected by the apportionment shall be entitled to appear and be heard or make representations in writing.

(5)A surplus in respect of an earlier period of account shall be applied under this section before a surplus in respect of a later period of account.

(6)All such adjustments to the liability to tax of any person shall be made, whether by assessment or otherwise, as may be required to give effect to this section.

(7)In this section—

• “add” has the same meaning as in section 83 above;

• “demutualisation” has the same meaning as in section 83 above;

• “the relevant period of account” means the period of account of the company from which the subsequent transfer is effected which consists of or includes the accounting period of that company which—

  (a)

  ends with the day on which the subsequent transfer is effected; or

  (b)

  if the subsequent transfer is a transfer of business falling within section 83(6)(c) above and no accounting period of the company ends on that day, ends next after that day;

• “surplus” has the same meaning as in section 83AA above;

• “transfer of business” has the same meaning as in section 83(3) above;

• “transferee company” means the company to which the subsequent transfer of business is effected.

(8)Where it is necessary for any purpose of this section to identify the time at which a demutualisation of a company takes place, that time shall be taken to be the time when the company first issues shares.

(9)A transfer of business falling within section 83(6)(c) above shall be treated for the purposes of this section as a transfer of business from the company which is the reinsured under the contract of reinsurance to the company which is the reinsurer under that contract.”