GIM7360 - Equalisation reserves: the tax rules: mutuals and partial mutuals

The subject of mutuality is discussed in GIM9000.

A mutual insurer will be taxed only on its investment income and chargeable gains. Because neither underwriting income nor expenses are taken into account for tax purposes, transfers into, and out of, the regulatory equalisation reserve will have no tax consequences for insurance companies conducting business on a mutual basis.

Normally, an insurance business is either wholly mutual or not mutual at all; but as explained in GIM9040 there is a limited range of circumstances in which it may be appropriate to divide the business into mutual and non- mutual parts for tax purposes. The tax regulations provide special rules for apportioning the transfers in and out of an equalisation reserve in these exceptional cases.

Partial mutuals

Whilst it is possible for an insurance company to operate partly on a mutual basis and partly not, the regulatory rules generally make no distinction between the two types of business.

A single equalisation reserve will be maintained on any relevant business, whether mutual or not. For tax purposes we need to be able to separate the movements in the equalisation reserve attributable to the non-mutual part of the business so that proper tax relief can be given.

Regulation 6 of the tax regulations provides that in these circumstances a separate reserve is be calculated for tax purposes. This is to be based on the figures used for regulatory purposes, but should take account only of those premiums and claims that relate to the non-mutual part of the business. Tax deductions and additions are then given on the transfers into and out of this 'shadow’ reserve. See GIM7230 on shadow reserves.

Tax relief may be waived in the normal way ( GIM7250), and double taxation relief calculations are to be made based on the shadow reserve.