GIM9060 - Mutual insurance: tax treatment: accounting periods ending before 1 October 2002: loan relationships

The tax treatment of corporate and government debt – loan relationships - is governed by Chapter 2 Part 4 FA 1996 (see GIM5090). However, where a company carries on general insurance business on a mutual basis, FA96/S103 (3) provides that the activities are not to be treated as constituting a trade or part of a trade. This has the effect that none of the rules applying to trading activities will apply to the profits and losses from loan relationships of such a company. Instead it will be treated as a non-trader for all purposes, so that the various special rules which apply only to non-traders will apply to it, including those relating to:

• convertible securities (FA96/S92) where only interest is brought into account by the holder;
• assets linked to the value of chargeable assets (FA96/S93) where only interest is brought into account by the holder or the issuer;
• index-linked gilts which are subject to an indexation adjustment where credits or debits are determined by reference to the value of the security at any time (FA96/S94). Note that this adjustment is made where the accruals basis applies as well as where mark to market applies;
• gilt strips: where gilts are “stripped” by being divided up into a number of gilt “strips” representing each interest payment and the principal payment, a company is deemed to have disposed of the gilt at its then market value and any profit or loss brought into account in accordance with the appropriate basis as if the security had been redeemed – (FA96/S95 (2));
• gilt strips: where “stripped” gilts are reconstituted from a number of gilt “strips” representing each interest payment and the principal payment, a company is deemed to have disposed of each of the strips at its then market value and any profit or loss brought into account in accordance with the appropriate basis as if the strip had been redeemed – (FA96/S95 (3));
• the two “protected” gilts, 3½% Funding stock 1999-2004 and 5½% Treasury Stock 2008-2012 (FA96/S96) where only interest is brought into account by the holder.

The rules for giving effect to loan relationships profits and losses are the non-trading rules, so that the aggregate of credits and debits representing those profits and losses is either an amount chargeable under Case III or a non-trading deficit which may be relieved as set out in FA96/S83 and FA96/SCH8.