Section 46 Schedule 23: Insurance Companies
Summary
1.Section 46 and Schedule 23 replace existing guidance on the tax treatment of additions made by a life insurance company to its long term insurance fund (LTIF) with a clear statutory framework. Whilst ensuring that additions brought into account in the company’s regulatory return are not taxable receipts it also counteracts the tax benefit which can arise when an addition to the LTIF enables a company to realise a Case I loss that does not reflect an economic loss incurred in the company’s life assurance business.
2.The section and Schedule also clarify the transitional rules governing relief for repayments of contingent loans taxed under section 83ZA of the Finance Act (FA) 1989, amend the rules governing the calculation of the ‘floor’ for gross roll up business investment return, to ensure consistent treatment of foreign business assets and amend section 32 of the Taxation of Chargeable Gains Act 1992 (TCGA).
Details of the Schedule
Transfers from non technical account not to be receipts
3.Paragraph 1(1) amends section 83 of FA 1989 so that additions of assets by a life insurance company to its LTIF on or after 22 April 2009 which are brought into account in the company’s regulatory return are not taxable receipts.
No deduction for capital allocations to with-profits policy holders
4.Paragraph 2(1) amends section 82 of FA 1989 so that amounts allocated to with-profits policyholders which are capital and not funded out of income brought into account in the regulatory return are not allowable deductions in computing Case I profits. It makes it clear that where amounts are allocated to policy holders in respect of amounts payable in connection with the reattribution of inherited estate those amounts are to be treated as being capital.
Limits on loss relief for addition to non-profits funds
5.Paragraph 3(1) inserts into the Income and Corporation Taxes Act 1988 (ICTA) new sections 434AZA, 434AZB and 434AZC.
6.New section 434AZA restricts the Case I loss of the company’s life assurance business available to set off against the company’s other income of the accounting period or to surrender as group relief when:
there has been an addition to a non profit fund of the company; and, in that period of account or a subsequent period of account,
the company has made a book value election in respect of a non-profit fund or funds; and/or
arrangements have been entered into the purpose or main purpose of which is to reduce the admissible value of the assets of a non-profit fund or funds.
7.New section 434AZB determines the extent to which the Case I loss is to be restricted. The restriction in respect of a period of account is the least of:
the addition or additions to the company’s non-profit fund or funds made in that period of account and/or, to the extent that it is attributable to additions made in earlier periods of account, the unappropriated surplus of a non-profit fund or funds carried forward to that period of account;
any amount(s) shown in Line 51 of Form(s) 14 for the company’s non-profit fund or funds and/or any reduction in admissible value of assets, other than structural assets attributable to the arrangements; or,
the amount of the loss arising on the company’s life assurance business.
8.When a loss arising in a period of account has been restricted there will be a corresponding reduction in the amounts available to restrict losses in subsequent periods of account.
9.New section 434AZC contains supplementary provisions. Subsection (2) applies section 434AZA and 434AZB to a non-profit part of a with-profit fund. The non-profit part of a with-profit fund is that part of the with-profit fund which belongs to the company and in whose profits the with-profits policyholders are not entitled to participate. The subsection ensures that for this purpose it is treated in the same way as a non-profit fund.
Financing-Arrangement-Funded Transfers to Shareholders (“FAFTS”) and Contingent Loans
10.Paragraph 4(1) amends Paragraph 4(5) of Schedule 17 to FA 2008 to make it clear that, for the purposes of calculating any relief on a subsequent repayment of an existing loan, transfers to shareholders which take place on or after 1 January 2008 do not need to be taken into account in computing the relief due. This ensures that the tax treatment on repayment of such a loan is effectively the same as it would have been had section 83ZA of FA 1989 continued in force.
Apportionment: Foreign Business Asset
11.Paragraph 5 provides for the references to foreign business assets (which effectively exclude them from the calculations) in subsections 432E(3)(a), (4) and (4A) to be omitted. When the concept of “foreign business assets” was introduced by Paragraph 10 of Schedule 17 to FA 2008 the intention was to allow the apportionment rules in section 432E(3), commonly known as the “floor”, to operate without seeking to distinguish the income from foreign business assets, because it would be impracticable to do so. For the purpose of the apportionment it is necessary for the foreign business assets to be removed from both the numerator and denominator of the apportionment fraction. Paragraph 5 does that by removing all remaining references to “foreign business assets” in the relevant subsections.
12.Paragraph 6 makes consequential amendments to Paragraph 19(4) and (6) of Schedule 7 to FA 2007, again omitting references to foreign business assets.
Value Shifting attributable to transfer of business
13.Paragraph 8(1) amends section 32(1) of TCGA to insert a reference to section 211 of TCGA. As a result, a disposal within section 211, the transfer of an insurance business, will be protected from the application of the anti-avoidance rules in section 30, providing the requirements of section 32(2) are met. The amendment is therefore wholly relieving.
14.Subsection 8(2) provides that the amendment in sub-paragraph (1) shall apply to disposals on or after 22 April 2009.
Background Note
15.Currently the tax treatment of additions made by a company to its long term insurance fund (LTIF) is governed by a combination of case law and an unpublished concession in guidance. A company may add capital to its LTIF for regulatory or commercial reasons but in certain circumstances amounts are added with the intention of obtaining a tax advantage.
16.The impact of the existing case law and concession is uncertain for both HMRC and the industry. The legislation attempts to remove that uncertainty by providing that the default position for such capital additions is that they are not taxable. It then identifies a number of sets of circumstances where such an addition has been made where reliefs shall be restricted. At the same time the opportunity has been taken to apply consistent treatment to the allowance of “capital” bonuses paid to policyholders – whether those bonuses are funded from a non-taxable capital addition or some other untaxed source.
17.The income and gains of a company’s life insurance business are taxed as they are brought into account in the company’s regulatory return to the Financial Services Authority (FSA). In general terms the measure seeks to restrict relief when tax-deductible expenditure is incurred but this is not matched by the bringing into account of a corresponding amount of taxable income. Circumstances in which this may occur, are set out in the following three examples, which correspond to the restrictions to relief found in new section 434AZA and the new subsection (2A) of section 82 of FA 1989.
Example 1: Book value election
18.FSA rules permit an insurance company to recognise the total value of its LTIF assets at an amount less than their admissible value. The use of a value less than admissible value is known as ‘making a book value election’. Recognising assets at less than admissible value defers the bringing of income and gains into account for both tax and regulatory purposes. When a non-taxable addition to the fund is available to frank tax-deductible expenditure and the company chooses to defer the recognition of taxable income and gains by way of a book value election there will be a tax loss which does not reflect a commercial loss of the life insurance business.
Example 2: Manipulation of admissible value
19.FSA rules prescribe that, in certain circumstances, generally to reflect concentration and counterparty risk, the admissible value of a company’s assets must be less than market value. The admissible value of the fund’s assets can be manipulated by acquiring or creating assets which have little or no admissible value. The fair value of the assets of the fund is unchanged. A non taxable addition to the fund may allow a company to create a tax effective reduction in admissible value whilst maintaining the value of the fund for regulatory purposes. Effectively this creates a tax loss where there is no commercial loss.
Example 3: Capital allocations to with-profits policy holders
20.The ability of a company to defer recognition of income and gains allows it to smooth the profits allocated by way of bonuses to with-profits policy holders. Currently all amounts allocated to with-profits policy holders are allowable deductions in computing the profits of a company’s life assurance business whether or not that allocation is made out of recognised income and gains.
21.In certain circumstances payments may be made which do not represent an allocation of profits to policyholders but are instead of a capital nature, e.g. a payment for giving up rights under the policy. Such capital payments will represent an acceleration of the allocation of the profits of the fund to policyholders and providing this is matched by an acceleration in the recognition of profits this is unobjectionable. In some circumstances allocations of a capital nature will not be funded from recognised income and gains but will instead be funded by an addition to the fund.
Financing-Arrangement-Funded Transfers to Shareholders (“FAFTS”) and Contingent Loans
22.Paragraph 4 provides clarification of the rules governing FAFTS. FA 2008 introduced new rules to deal with FAFTS relating to non-profit funds. FAFTs are a type of financing arrangement whereby a loan made to, or financial reinsurance arrangement made by, an insurance company can have the effect of accelerating taxable surplus. For contingent loans these rules replaced the provisions of section 83ZA of FA 1989. Paragraph 4 of Schedule 17 provided transitional rules where a contingent loan was in place when the new rules came into effect (that is in relation to accounting periods beginning on or after 1 January 2008).
Apportionment: Foreign Business Asset
23.Paragraphs 5 to 7 provide clarification of the apportionment rules for with-profit funds set out in section 432E of ICTA. This section provides for an apportionment of life insurance company profits. The changes ensure that, where the company has foreign business, adjustments made for “foreign business assets” are made consistently.
Value Shifting attributable to transfer of business
24.The value shifting provisions at sections 29 to 34 of TCGA are anti–avoidance measures applicable to companies generally. Section 32 is concerned with transfers within groups at artificial values. Where such a transaction gives rise to a capital loss the anti avoidance provisions may apply to restrict or eliminate the loss. For companies generally the value shifting rules do not apply if the disposal of the underlying asset is effected within the group for bona fide commercial reasons and does not form part of a scheme or arrangements of which the main purpose, or one of the main purposes, is avoidance of liability to corporation tax
25.This exemption is not currently available to life insurance companies when they transfer business within their group. They can therefore be exposed to the effect of the anti avoidance provision, even if the transaction is commercial and has no tax avoidance motive. Paragraph 8 extends the protection currently given to other companies to Life companies involved in a commercial transfer of business, providing the relevant conditions are met.
