GIM5200 - Taxation of the investment return: investment gains: periods of account beginning on or after 1 January 2002: transition from realisations basis: transitional measures

FA02/S65 and FA02/S66 are two relieving measures specifically aimed at easing the transition for insurance companies in the accounting period in which they begin to follow mark-to- market for tax purposes:

Retention of the realisations basis until 31 December 2001

FA02/S65 effectively sanctions retention of the realisation basis until periods beginning on or after 1 August 2001, that is until 31 December 2001 for companies with a 31 December year end.

Section 65 does not apply if a company changes the accounting date of its period of account beginning on or after 1 January 2001 in an attempt to postpone the requirement to use mark- to-market, unless the change of date was notified to the Registrar at Companies House (or its equivalent overseas) before 17 April 2002 (Budget Day) (FA02/S65 (4)).

Retention of the realisations basis for assets held at 1 January 2002

FA02/S66 further eases the transition by enabling those companies to elect for further postponement in bringing profits and losses into account. They can elect to retain the realisation basis for all assets held at 1 January 2002.

If section 65 has had effect to postpone the advent of mark-to-market, section 66 permits the company to elect to apply it only to assets acquired after 1 January 2002 - note this date is fixed whatever the company’s period of accounts. The election must be made within 12 months of the accounting period current on 1 January 2002, so that a company with a calendar year period has until 31 December 2003 to elect. See GIM5110 for the treatment of exchange gains and losses in periods beginning before 1 October 2002 and GIM5120 for later periods.

Under IAS39, Recognition and Measurement of Financial Instruments, financial concerns including general insurers may designate non-derivative financial assets on first recognition as “available for sale” (AFS). Such assets are measured at fair value, but changes in value are recognised directly in equity rather than being taken through the profit and loss account. Generally, a computational adjustment is required to recognise the value changes for tax purposes, under ICTA88/S472A. However, this type of valuation is considered to fall within the “mark to market” definition of FA02/S66 (2) and may thus benefit from the transitional arrangement described above. The result of this is that no computational adjustment is required to bring into account any valuation differences where ICTA88/S66 election applies to maintain the realisation basis.