GIM5230 - Taxation of the investment return: investment gains: structural assets

Insurers may argue that part of their portfolio of investments consists of “core funding”. They may claim that gains on the disposal of such investments should be taxed as chargeable gains (or even, from 1 April 2002, exempt under the substantial shareholdings rule in TCGA92/SCH7AC) rather than on the realisation or mark-to-market basis.

They may cite the case of CIR v Scottish Automobile and General Insurance Ltd (16TC381) in support of this view. Such claims should be resisted. The facts in Scottish Automobile were very unusual, and the case stands out as an exception to the general rule. Grave doubt was cast on it in Punjab Co-operative Bank, Amritsar v ITC, [1940] AC 1055, and it does not sit easily with the decision in General Reinsurance Co Ltd v Tomlinson (48TC81) ( GIM5150).

The special status of the investments of an insurance company was recognised in the much more recent Nuclear Electric case (68TC670), and the quotations at GIM5020 are useful in showing the current thinking of the Courts on this issue.

Share in subsidiaries

The status of shares in subsidiaries and associated companies is rather more complicated. The shares in a subsidiary which is itself carrying on insurance business, or some related activity in the financial sector, are obviously not usually held in order to be turned over as part of the investment portfolio. Of course, in the last resort they might have to be sold in order to meet claims. On the other hand insurers may hold certain types of investment, such as farm land or a portfolio of investments, through subsidiaries for non-tax reasons. The sale of the shares in such a subsidiary might well be assessable as a trade profit, depending on the facts. The status of subsidiaries affects not only the eventual sale proceeds but may also affect the treatment of unrealised gains and losses where mark to market applies and group treatment.

Certain reliefs, elections etc. may not apply where assets are ones from which a profit falls to be treated as a trading receipt. Group relief for losses may be ruled out by ICTA88/S413 (5)(a) which excludes any share capital, the profit on sale of which would be a trading receipt, from being taken into account in determining whether a company is a 75% subsidiary for group relief purposes.

There are similar provisions in sections ICTA88/S402 (4) (consortium relief), regulation 6 SI1999/358 (Shadow ACT) and FA89/S102 (surrenders of tax refunds within a group).