A number of different schemes have been used under which
groups of Names have transferred syndicate capacity to a company
which is a corporate member of Lloyd’s. Such schemes require
the Name to make their Funds at Lloyd’s (FAL) interavailable
to the company. In consideration of the transfer of capacity and
the interavailable FAL, the company issues shares and/or loan stock
to the Name.
Some schemes have required the converting Name to pay up a
certain part, or certain classes of share, or certain categories of
loan stock only if the conversion vehicle incurs losses. Capital
gains tax issues arise in such cases and are dealt with at
LLM6040. Each scheme is different and the
tax treatment will depend on the facts of each case.
The conversion vehicle in such cases is the underwriting
member of Lloyd’s and is taxable according to the normal
rules in FA94 that apply to corporate members (
LLM4000+). The converting Name is a
participator (a shareholder or loan creditor) of the conversion
vehicle and is not an underwriting member by virtue of their
interest in the company. The converting Name may of course quite
separately continue to be an underwriting member for run-off or new
years of account.
Where the conversion vehicle makes profits and distributes
those to the converting Name, the income is taxable according to
the terms of the agreement. That is, depending on the facts of the
case, it may be taxable as a dividend, as interest, or as
“income not otherwise charged” – the former Case
VI of Schedule D. It will not be taxable under the rules in FA93 (
LLM5000+), nor will it be taxable as
income from a separate trade.
Where the conversion vehicle makes losses, the Name may be
required to pay up amounts in respect of the shares and loan stock
received, in order to cover the company’s underwriting
losses. Any amounts paid for the shares or securities may now be
irrecoverable or have become of negligible value. In such cases the
participator may have incurred a capital loss based on the
difference between the value of the investment on conversion and
the date on which negligible value was agreed by Shares and Assets
Valuation.
LLM6040 explains the capital gains tax
issues in such cases.
