REV BN 4: Life Insurance Companies

Who is likely to be affected?

1. Life insurance companies and friendly societies.

General description of the measure

2. The measures will:

• counter tax avoidance by life insurance companies using certain types of financial reinsurance;
• remove a tax disincentive to company reorganisations where life insurance business is transferred to another company but some assets are retained to match certain retained liabilities; and
• correct small errors in measures introduced in earlier years.

Operative date

3. The measure relating to transfers of business will apply for transfers on or after Budget Day. The measure relating to financial reinsurance will apply to accounting periods ending on or after Budget Day. The minor corrections will mainly apply to accounting periods ending on or after Budget Day, but one will apply only from Royal Assent.

Current law and proposed revisions

4. Finance Act 2003 introduced various measures to counter avoidance involving transfers of life assurance business from one company to another. One such measure imposed a tax charge where assets of the long-term insurance fund were retained by the transferor. Such a charge would be inappropriate where assets are retained solely to meet certain retained liabilities, so the Finance Bill will include relief from the charge in these circumstances.

5. Financial reinsurance can be used to temporarily reduce a life insurance company’s liabilities to policyholders as measured for the purposes of its regulatory return. Some companies have sought to use such arrangements to permanently reduce their trading profits for tax purposes. Litigation may be necessary to decide whether such schemes succeed for previous years, but a measure in the Finance Bill will remove the benefit and bring certainty for future years .

Further advice

6. If you have any questions about this change, please contact Richard Thomas on 020 7438 6553 or Robert Peel on 020 7438 6256.

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