GIM9160 - Mutual insurance: change of status to non-mutual: transitional issues

Where a company ceases to be a mutual general insurer, its profits for subsequent accounting periods are brought into account under the provisions of Case 1 of Schedule D as described in GIM4000+ and GIM5000+. But there are some transitional issues.

CG assets

Unless assets on which a chargeable gains would arise (such as shares and land) are disposed of and reacquired before the end of the mutual period, gains which accrued but were not realised during the period of mutuality would be included within the Case 1 trading receipts when the asset is disposed of.

TCGA92/S161 does not apply in this situation as the assets are trading stock within the meaning of TCGA92/S288 both before and after the transfer.

Loan relationships, financial instruments and derivatives

The only differences between the mutual and post mutual treatment are:

• the special rules described in GIM9060 no longer apply. In the case of assets within FA96/S92 or FA96/S93 for the mutual business, there will be a deemed disposal of a CG asset by virtue of FA96/S92 (7) or FA96/S93B (see CFM 6160 & 5930);
• if the change takes place at the end of an accounting period ending before 30 September 2002, the Forex rules in Chapter 2 Part 2 FA 1993 will start to apply, as the company will no longer be in exempt circumstances. Profits and losses on loan relationships and financial instruments will become trading receipts and expenses;
• if the change takes place at the end of an accounting period ending on or after 30 September 2002, profits and losses on loan relationships and derivative contracts (including exchange gains and losses) will become trading receipts and expenses. Profits and losses on derivatives over shares etc. in FA02/SCH26/PARA5 will fall within the derivative contracts legislation in FA02/SCH26.

Equalisation Reserves

As a mutual, the company will have been required to maintain equalisation reserves for regulatory purposes, unless it counts as an “assessable mutual” (such as a P & I Club), but they will have had no relevance to the company’s tax position. For its non-mutual periods the company’s deductions and receipts in relation to transfers to and from the reserve will simply follow the position for that period as reflected in the regulatory reserve. See GIM7360.

Other technical provisions

The opening technical provisions, claims outstanding, UPP and URP, will be the figures shown in the company’s accounts. Where the first period of non-mutuality is a period beginning on or after 1 January 2000, FA00/S107 will apply. In making the calculations no amounts will be treated as taken into account for tax purposes for mutual periods. See GIM6150 for further details of FA00/S107.