REV BN 21: Life Insurance Companies

Who is likely to be affected?

1. These measures affect life insurance companies.

General description of the measure

2. Measures relating to life insurance companies were announced in the PBR 2004 when draft Finance Bill clauses and regulations were published. As a result of consultation undertaken since PBR, the proposed legislation to implement some of these measures has been significantly revised so that the measures more
closely meets the policy objectives. The measures to be included in the Finance Bill will:

  • prevent certain transfers of business from one life insurance company to another artificially reducing taxable trading profits, in particular where the transferred liabilities exceed the transferred assets or the transferee’s long-term fund holds shares in the transferor. The relevant measures will apply to all transfers of business on or after 2 December 2004;
  • clarify the circumstances in which companies can treat receipts as “notional” and therefore exclude them from their returns of taxable trading profits. The relevant measure will apply to accounting periods ending on or after 2 December 2004;
  • clarify the circumstances in which companies can use additional revenue accounts (“sub-funds”) to obtain a more favourable tax apportionment of their investment return. The relevant measure will apply to accounting periods beginning on or after 1 January 2005; and
  • provide for the updating of the tax treatment of income and gains attributable to assets not needed to pay policyholder benefits and ensure that, for accounting periods beginning on or after 1 January 2005, such income and gains will be taxed at normal corporation tax rates.

Operative date

3. See above.

Current law and proposed revisions

4. A full explanatory note was published at the time of the PBR announcement describing the proposed changes.

5. In the light of representations received from the industry, changes have been made to the proposals.

6. The changes relating to transfers of business are as follows:

  • under the original proposals there is a deemed trading receipt where transferred liabilities exceed assets; an excess of assets over liabilities is excluded from the computation of trading profits. In comparing assets and liabilities, debts will now be taken into account only if they are more than the excess of the value of transferred assets over the amount shown in the revenue account;
  • the original proposals provided that the measure of liabilities used in this comparison could not be reduced by reinsurance. That measure now can be reduced where the reinsurance was entered into by the transferor, the liabilities were so reduced before transfer and the reduction was reflected in computations of the transferor’s trading profits; and
  • where business is transferred from one insurance company to another whose long-term insurance fund wholly or partly owns it, the amount of the reduction in the value of the transferee’s shareholding in the transferor will give rise to a trading receipt. This will now be reduced by the value of any assets transferred from the transferor’s shareholder fund that itself constitutes a trading receipt.

7. The proposals about excess assets (the “inherited estate”) were included in draft regulations at PBR. On 10 December the Government announced that the proposals would be included in the Finance Bill instead. Since then there has been a consultation exercise with the industry to refine the proposals. The outcome of
that consultation is that the Finance Bill will contain an amendment to existing regulation making powers. This will enable the apportionment rules applicable to life assurance companies to be modified in a way that achieves the Government’s object in bringing forward the original proposals. The regulations when made will apply to accounting periods beginning on or after 1 January 2005.

8. The proposals about sub-funds will be amended to deal with a case not covered by the draft legislation. This is where a non-profit fund is embedded within a with-profits fund. In that case the with-profits fund will be treated as consisting only of those parts which are not included in the non-profit fund.

Further advice

9. If you have any questions about these changes, please contact Richard Thomas on 020 7147 2558 or Robert Peel on 020 7147 2614. Information about Budget measures is available on the Inland Revenue website.

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