UK: Life Tax Measures - Update Following Publication of the Finance Bill

Last Updated: 9 May 2003

The Finance Bill 2003 was published on 16 April. It contains the changes foreshadowed by the Inland Revenue announcement on 23 December 2002. However a number of significant alterations to the proposals have been made.

The amending provisions are in clause 169 (Volume I of the Bill page 108) and the detail is contained in Schedule 33 (Volume II pages 373 to 396). As usual, the Bill was accompanied by Explanatory Notes issued by HM Treasury, the parts relevant to clause 169 and Schedule 33 being in Volume II of the notes, 72 pages under the heading "Board of Inland Revenue, Finance Bill 2003 Clause 169, Schedule 33".

The full text of the Bill is available on the United Kingdom Parliament website (www.publications.parliament.uk) and the Explanatory Notes are available on the HM Treasury website (www.hm-treasury.gov.uk).

This briefing provides an update on the life tax measures contained in the Bill, and changes made between the publication of draft legislation in January 2003 and the publication of the Bill.

The legislation is intended to reform:

  • Scope of Case I receipts
  • Treatment of insurance business transfers for tax purposes (including the carry over of losses and the Case I tax position of the transferor and the transferee)
  • Treatment of capital losses (the legislation is particularly targeted at the prevention of "bed and breakfasting" both externally and internally to the life company, and it is proposed to be amended to throw a ring-fence around policyholder chargeable gains and allowable losses)

The capital gains proposals apply to gains accruing and deemed disposals on or after 23 December 2002, although there is an exclusion for losses below £10m arising in the period between 23 December and 31 December 2003 (see below for further details). The majority of the other proposals will apply to periods of account beginning on or after 1 January 2003. Certain provisions which were not signalled in the 23 December press release or draft legislation published on 21 January 2003 are effective from Budget Day, or, if relieving rather than charging provisions, for periods of account beginning on or after 1 January 2003.

The rest of this article considers the provisions in more detail, and in particular the extent to which the provisions reflect (or do not reflect) concerns represented to the Inland Revenue, and any new provisions contained in the Finance Bill which were not contained in the original press release of 23 December or the subsequent draft legislation.

Case I profits of life assurance

The main thrust of the 23 December proposals has been incorporated into the Bill. The main Case I proposals as currently drafted are summarised below:

  • For periods of account beginning on or after 1 January 2003, where a life insurer transfers assets directly out of the investment reserve the amount of the transfer will be treated as a taxable receipt and included in the computation of profit (proposed new section 83(2B) FA 1989). The reference to "payments made" included in the draft legislation published in January has been removed. Despite this, the wording of the Explanatory Note (and the nature of the items which the proposed legislation is intended to treat as a taxable receipt) make it clear that it is not the intention to exclude cash transfers from section 83(2), or, indeed, section 83(3) (see below). Furthermore, the scope of the proposed provisions makes it clear that section 83(2B) is applicable to an insurance business transfer.
  • An exception is proposed to section 83(2B) FA 1989 for transfers of assets made for at least their fair value (proposed new section 83(2D) FA 1989). Furthermore, transfers of assets to discharge loan or other liabilities are excluded unless they constitute the discharge of a liability in respect of which the principal was brought into account on Form 40 but not taken into account as a receipt (proposed new section 83(2C) FA 1989). The latter is intended to "catch" repayments of contingent loans where the initial receipt was entered into Form 40 but not treated as a taxable receipt (see further detail below with regard to contingent loans).
  • Proposed new section 444AD of the Taxes Act provides a further exception to section 83(2B) for the value of assets transferred under an insurance business transfer scheme, where the transferor and transferee have jointly elected under proposed new section 444AD that the value should be transferred from the investment reserve of the transferor into the investment reserve of the transferee.
  • The draft legislation published earlier this year contained a further exclusion where payments made by the transferee directly or indirectly derive from amounts on which the transferor was charged to tax under section 83(2B) FA 1989. This would, for example, have applied where assets are transferred from the long term fund of the transferor into the shareholder fund of the transferee, and a contingent loan is made into the transferee to make up the shortfall. The section would have applied to prevent a double charge under section 83(2B) in both the transferor and transferee. The Inland Revenue have stated in their explanatory note that this is to be withdrawn.
  • Section 83(2) FA 1989 is proposed to be rewritten so that "other income" is "taken into account" as a Case I receipt, subject to certain limited exceptions.
  • Proposed new section 83ZA FA 1989 has been introduced to deal particularly with contingent loans, where, as highlighted in our January briefing, the initial proposals would have given rise to significant mismatches or even double taxation in respect of historic transactions, and would have jeopardised the efficiency of such funding in the future. The way in which section 83ZA operates is considered further below.
  • FA 1996 Schedule 11 (loan relationships) is proposed to be amended to provide that where an insurance company stands in the position of a debtor as respects a contingent loan made to a company within the meaning of section 83ZA, it is not regarded as arising from a transaction for the lending of money. Therefore the loan relationship rules apply only to interest in respect of it.
  • Changes are proposed to be made to the anti-avoidance provision contained in section 83(3) FA 1989, which operates to treat as a taxable receipt an addition to the long term fund which would not otherwise have been taxable, to the extent that the addition was made as part of or in connection with a transfer of business or demutualisation, and to the extent that the life company makes losses in the current period or future periods. A transfer of business is defined in current law as including a "total reinsurance", the definition of which is restricted to the reinsurance of business written prior to the reinsurance. Furthermore, a transfer of business does not include a transfer of business where the reinsurer is a "pure reinsurer". Both of these exclusions from the definition of "transfer of business" are removed. The impact of this is discussed further below.
  • Proposed new section 444AE of the Taxes Act deals with transfers of contingent loans under an insurance business transfer, and provides that a loan will be treated as having been repaid in the transferor immediately before the transfer and made to the transferee immediately after the transfer. This is presumably drafted to preclude arguments from taxpayer companies that the accounting treatment for the loan in the past was in a different company, and therefore the rules applicable to the repayment of that loan do not apply to the transferee.
  • Section 83AA(3) FA 1989, which required the matching of a "tainted addition" with a loss in the transferor in certain circumstances, is proposed to be repealed.
  • The deduction for policyholder tax is proposed to be redrafted (new section 82A FA 1989) so that it is not necessary that the tax be "expended in respect of the period of account". The effect is that a deduction for deferred tax provisions is no longer precluded. However the full extent of the policyholder tax deduction is subject to the publication of regulations, and the Inland Revenue have stated that stop-gap regulations may be required if definitive regulations cannot be agreed upon in time for Royal Assent.
  • Section 432E of the Taxes Act ("the Needs Basis") is proposed to be redrafted so that unallocated surplus arising in a mutual will no longer be diverted into BLAGAB (and therefore not taxed on the profits basis). The Inland Revenue’s view is that this will not affect existing mutuals because they tend not to have significant unallocated surplus arising, and that the provision was used by life insurers intending to demutualise, to declare surplus prior to demutualisation which was then not taxed either in the transferor or transferee. Furthermore, a section 83(2B) receipt will be treated as additional profit for the purposes of the Needs Basis in either a mutual or a proprietary company.

FA 1989 section 83(2) (Schedule 33 paragraph 2 to the Bill) – Case I receipts and expenses

Section 83(2) (which used to refer to "real world" concepts outside the regulatory return, such as investment income and increase in value of assets) is now recast, with effect for periods of account beginning on or after 1 January 2003, and will be tied much more closely to the Form 40 line descriptions, by requiring

  1. investment income receivable before deduction of tax,
  2. any increase in the value of non-linked assets,
  3. any increase in the value of linked assets, and
  4. d) other income

(in each case so far as referable to life assurance business and brought into account in the regulatory return) to be "taken into account" (i.e. taxable).

The Explanatory Notes state at paragraph 43 that these items are not exhaustive and if an amount meeting the description is included in another line of Form 40 this too is taxable by virtue of section 83(2).

In response to concerns about the accounting for contingent loans as "other income" specific provisions have been introduced in respect of contingent loans (see below). However, contingent loans are only one example of the impact of the proposed changes. It appears that any item brought into account as "other income" and not benefiting from the express exclusions in the legislation is taxable, and that it is no longer possible to argue on basic principles that the amount is non-taxable. Those exclusions are restricted to entirely notional amounts (such as head office rents), pre-CTSA interest on tax overpaid and an excess of assets obtained over liabilities assumed on a Part VII transfer (proposed section 83(2A) FA 1989), but, perhaps significantly, not for payments for group relief. There is no explicit exclusion for intra-fund transfers which are treated as other income in the transferee sub-fund, or for amounts which are not Case I receipts under basic Case I principles.

Furthermore, there is no statutory deduction for "other expenditure". If all categories of income are to be deemed to be Case I receipts, it is not clear why all categories of expenditure should not be deemed to be Case I deductions.

There is a further deeming provision (proposed section 83(2B) FA 1989) which applies to assets forming part of the long term fund which are transferred so that they cease to be part of the long term fund. The fair value of such assets is deemed to be brought into account (for the period of account in which the transfer occurs) as an increase in the value of the long term fund, and taken into account for tax purposes.

There are some exceptions from the section 83(2B) deeming. Repayments of loans etc trigger the deeming only if the receipt of the loan was brought into account for regulatory purposes but not taken into account (for tax purposes) for the period of account in question (proposed section 83(2C) FA 1989). This is aimed at the position of a contingent loan the receipt of which was brought into account on Form 40 but which was treated as non-taxable and fiscally adjusted out of the corporation tax computation. Section 83(2B) provides for a deemed receipt where the repayment, rather than being disclosed in Form 40, is met from the investment reserve. In this case, the receipt of the loan would have given rise to a negative fiscal adjustment (decreasing taxable profit), but the expense would never have given rise to a positive fiscal adjustment (increasing taxable profits).

Surprisingly, the Bill makes no special provision for assets to be transferred after 1 January 2003 in pursuance of an obligation incurred before that date; if the obligation was incurred prior to 23 December 2002 it will have been incurred in ignorance of what the Finance Bill would provide. Indeed the relevant life office is likely to have written business on the assumption that the position as it existed on 23 December 2002 would continue. This is likely to apply, for instance, to repayment of borrowings, which may have been brought into account on Form 40 but not taken into account for tax purposes, for the calendar year 2002 or a prior period, because the tax significance of such "bringing but not taking" into account was not apparent until 23 December 2002. The inclusion of such transfers within the deeming provision sets an unhappy precedent in relation to legitimate expectations of taxpayers.

The Inland Revenue have confirmed that there is a drafting error (in the Bill as published) in proposed section 83(2C) FA 1989. If in one period of account ("POA 1") a loan is made and brought into Form 40 and "adjusted out" in the return for that year, and the loan is repaid in the current period of account ("POA 2"), the drafting does not provide that there is any "deeming" because the loan was not brought into account for "the period of account" (POA 2, see proposed section 83(2B) line 30, (2C) line 44) but instead for POA 1. The Inland Revenue have confirmed that "the" in section 83(2C)(a) should read "any". Therefore, there would be a "deeming" in the case supposed.

Further, the deeming is excluded where the transferred assets were transferred for at least their fair value and the consideration for the transfer is included in the long term fund (section 83(2D) FA 1989).

FA 1989 section 83(3) (Schedule 33 paragraph 2(3) to the Bill)

It is appreciated by the industry and practitioners that section 83(3), which treats additions to the long term fund as taxable if the addition was made as part of or in connection with an insurance business transfer to the extent that the life company would otherwise have incurred trading losses either in the period of the transfer or in later periods, casts its net too widely. The main reason for its wide operation is the fact that losses are not required to be connected in any way with the addition which triggers the provisions. As a result, a life company may lose the benefit of "innocent" losses, for example those incurred in the writing of new business.

The Bill does not contain any provisions to mitigate the effect of section 83(3). In fact, the effect is harshened by the recasting of the definitions of "transfer of business". This has been widened so that it now includes a new business reinsurance and reinsurance with a pure reinsurer. The withdrawal of the new business reinsurance exclusion has removed one method of protecting "innocent" losses against anti-avoidance provisions which should not operate against them in any case. These changes were not heralded in the 23 December press release or subsequent discussions, and should be resisted by the industry given that there is no softening of the thrust of section 83(3) to redress the balance.

The wording of section 83(3) itself has also been amended to refer to an addition of "assets" to the fund rather than an "amount". The carve-out for amounts which are specifically exempted from tax is removed, and replaced with an exclusion for assets acquired at fair value or proceeds from the sale of assets for not more than fair value.

Given the tightening of section 83(2), it would seem that section 83(3) is now capable of application only to a limited category of "additions" – amounts brought into account which are excluded from section 83(2), either by virtue of not coming within (a) to (d), or by virtue of a statutory exclusion. The main exclusion must be for transfers from the shareholder fund (these are not accounted for as "other income" in any case).

The statutory exclusions include the proposed section 444AC exclusion for the element of the transferee’s line 15 figure representing the transferor’s long-term insurance fund. It would appear possible to interpret the proposed legislation as making the figure excluded from section 83(2) by virtue of section 444AC susceptible to section 83(3) as an addition to the long-term insurance fund "as part of" a transfer of business, although this would not be a natural construction of the new wording.

"Contingent loans" and their repayment (Schedule 33 paragraph 3 to the Bill)

Proposed section 83ZA FA 1989 has been drafted to deal with this topic. Section 83ZA(1) defines the case where a "contingent loan is made to an insurance company".

  • Meaning of " a contingent loan is made" The definition of the case is important because it is not very intuitive. Such a case involves a factual element and a tax element. The factual element is in three alternative limbs – that a deposit is received by the company from a reinsurer or arises out of insurance operations of the company, or a debenture loan is made to the company or an amount is borrowed by the company from a credit institution (the terminology is old-fashioned and strange-sounding because it tracks that of the regulatory return).

The tax element is that the amount lent to the company is taken into account under section 83(2), i.e. is brought into account in Form 40 and treated as taxable income. (Where the proceeds of the loan are not so taken into account, e.g. because they are carried to investment reserve, or where (as historically would have been the case) the proceeds of the loan are not taxed because they are capital and not a trading receipt, proposed section 83ZA has no application). It is noteworthy that where a loan is made and there is no contingency attending its repayment, or the loan is one whose repayment depends on the existence of some specific fund, such as surplus, the case is still within proposed section 83ZA. This is deliberate. According to the "Explanatory Notes", paragraph 71, loans which are "absolutely" (as distinct from contingently) repayable would not normally be brought into account on Form 40 as a receipt, and limited recourse loans (and other loans made on special terms) could be the subject of a waiver by the Regulator to enable the obligation to repay them to be disregarded (and therefore the loan to be treated as regulatory capital) thus allowing/requiring the proceeds of the loan to be brought into account on Form 40 and bringing them within the scope of proposed section 83ZA.

  • Operation of proposed section 83ZA Proposed section 83ZA applies to contingent loans taken into account and made in a period of account beginning on or after 1 January 2003 (a loan is made when its proceeds are received by the borrowing company) – see Schedule 33 paragraph 3(3) of the Bill and proposed section 83ZA(2). The broad effect of proposed section 83ZA is to grant tax relief for the repayment of the loan.

It is easiest to explain the provisions first by reference to a case where only one loan is involved and it is outstanding for only one period of account ("POA1"). In such a case, there need to be established:

    • the amount which will or may at some later time become repayable in respect of the loan ("L");
    • the positive amounts shown in the regulatory return as transfers to non-technical account ("T");
    • the amount of any excess of liabilities assumed on Part VII transfers since the contingent loan was made, overlong term assets acquired on such transfers ("E");
    • the amount allocated to policyholders as bonuses ("B").

A tax deduction will be allowed for the period of account equal to "the appropriate amount" for POA 1, which is:

Max (L – (E +[T-{12% x B}])),0). (proposed section 83ZA(7) – (11))

If the loan continues for two or more periods of account, the calculation for the first period is as above. For second or subsequent periods, the appropriate amount is calculated in the same way, except that, for the term [T-{12% x B}] ("the relevant net transfer to shareholders") there is substituted the aggregate of such terms for the period of account in question, the period of account in which the loan was made and all intervening periods of account, and the tax deduction (for POA2…n) is restricted to the excess of the appropriate amount for each period over the appropriate amount for the last; and if such excess is negative (as where the appropriate amount for POAn falls short of the appropriate amount for POA (n-1)), the shortfall is a trading receipt (proposed section 83ZA(6)).

If the loan is repaid, a tax deduction is also available (provided the repayment amount is brought into account in Form 40 as other expenses) but is reduced by deductions previously given (proposed section 83ZA(13) and (14)).

If two or more contingent loans are outstanding there may be two or more periods of account in which such loans were made. The aggregation of net transfers to shareholders and excess liabilities on Part VII transfers ("E" in the equation above) is then by reference to the period of account in which the first loan was made (proposed section 83ZA(11)).

  • Overall effect of remodelled section 83(2) and proposed section 83ZA on "contingent loans" The overall effect of the amendments appears to be to create three relevant regimes – one for loans made prior to 1 January 2003 and fully repaid before that date, the second, for loans made prior to 1 January 2003 (and whether before or after 23 December 2002) but wholly or partly repaid on or after 1 January 2003, and the third for loans made on or after 1 January 2003.

The law as it stood prior to 23 December 2002 will apply to loans within the first regime.

The law as it stood prior to 23 December 2002 will apply to the advance of loans within the second regime. However section 83(2) as remodelled will apply to their repayment. The treatment will depend upon the treatment of the original advance for both accounting and tax purposes and the treatment of the repayment for accounting purposes.

  1. If the original advance was brought into account on Form 40 but not taken into account as a taxable receipt, and the repayment is not shown on Form 40, the repayment will constitute a taxable receipt under new section 83(2B);
  2. If the original advance was brought into account on Form 40 but not into account on Form 40 but not taken into account as a taxable receipt, and the repayment is shown on Form 40, the repayment will not be deductible (and thereby fiscally adjusted) under basic principles. Section 83ZA does not apply because the loan was taken out prior to 1 January 2003;
  3. If the original advance was not brought into account on Form 40 at all, or was taxed, the repayment out of investment reserve will not be caught by section 83(2B).

The third regime involves proposed section 83ZA and is explained above. The tax consequences of the repayment of a contingent loan under that proposed section are summarised in the table below.

A central feature of the third regime is that where the contingent loan remains unrepaid at the end of the year, and the receipt has been brought into account (and thus taken into account as a taxable receipt) the amount unrepaid is allowable as a deduction, less distributions to shareholders otherwise than those up to 12% of the allocations to policyholders (which permits the 1/9th of bonus in a standard 90:10 fund).

This feature has two results which one would not naturally expect from a regime which one would assume is intended to achieve tax neutrality for contingent loans.

The first result, which is commented upon in the Explanatory Note, is to tax the receipt of a contingent loan in a non-profit fund to the extent that it is used to make transfers to shareholders. The Revenue’s view is that the contingent loan in this situation permits the distribution to shareholders of profits which have not as yet emerged. It is not clear however why a life insurance company should be prevented from injecting funds into the long-term fund (by transfer, contingent loan or otherwise) and then extracting them if it later decides that those funds are not required in the fund. This may occur if at the beginning of an accounting period there is a clear need for funding (perhaps required by the FSA), but conditions have substantially improved by the end of the accounting period. The situation where there is a clear link between the making of a contingent loan and a subsequent distribution to shareholders may be distinguished from a situation where there is no such factual link (i.e. where there is merely a temporal coincidence). The legislation makes no such distinction.

"Contingent" loans made on or after 1 January 2003

Regulatory accounting for receipt of loan proceeds

Tax treatment of receipt of loan

Regulatory accounting for repayment

Tax treatment of repayment

Taken to investment reserve

Not taxable (not "brought into account")

Taken to investment reserve

No deduction

Not taxable (not "brought into account")

Deducted as an expense in Form 40

No deduction

Taken as "other income" in Form 40

Taxable - section 83(2)(3) "other income"

Deducted as an expense in Form 40

Deductible as permitted by proposed section 83ZA(13)

Taxable - section 83(2)(d) "other income"

Taken to investment reserve

No deduction (Proposed section 83ZA(13)(b))

The second result is that a contingent loan made into a With Profits Fund may be restricted by a transfer to shareholders made in a Non Profit Fund, although the contingent loan into the With Profits Fund is held for the benefit of the policyholders, and is not connected with the usual annual shareholder transfer arising from the writing of 0/100 business in the Non Profit Fund. The legislation appears to be aimed (as explained in the Explanatory Note) at the funding of distributions of future profits via contingent loans. Whether one agrees with this or not, a contingent loan made into the With Profits Fund would not, as a matter of fact, fund a transfer from the Non Profit Fund. This counter-intuitive result suggests that the drafting should apply to separate sub-funds rather than to the company as a whole.

Other transfer of business proposals

The measures included in the Finance Bill are summarised below:

  • Where there is an insurance business transfer and the final period of the transferor for which the annual regulatory return is drawn up is otherwise than immediately prior to the transfer, a deemed regulatory return is required for tax purposes (proposed new section 444AA of the Taxes Act (Schedule 33 paragraph 16 to the Bill)).
  • Where assets are left behind in the investment reserve of the transferor, those assets are to be taxed as a Case VI receipt (rather than, as originally proposed, as a post-cessation receipt). Proposed new section 444AB of the Taxes Act (Schedule 33 paragraph 17 to the Bill) will impose a Case VI charge on the "taxable amount", which is the non-BLAGAB fraction of the "previously untaxed amount", or, in the case of an insurer charged to tax under Case I of Schedule D (an actual Case I company), the whole of the "previously untaxed amount". The "previously untaxed amount" is defined as the lesser of the fair value of the assets held by the transferor in its long term fund immediately prior to the transfer, and the excess of those assets over the liabilities immediately before the transfer. This should mean that the "untaxed amount" is equal to the investment reserve.
  • Proposed new section 444AC of the Taxes Act provides that where the transferee’s line 15 ("other income") figure representing the transferor’s long term insurance fund exceeds the amount of liabilities transferred, this is not regarded as other income of the transferee for the purposes of section 83(2)(d) of the Finance Act 1989. The term "the element of the transferee’s line 15 figure representing the transferor’s long-term insurance fund" is defined as "the amount which is brought into account by the transferee as other income in the period of account of the transferee in which the transfer takes place, as represents theassets transferred to the transferee".
  • Proposed new section 444AD of the Taxes Act provides that the transferor and transferee may elect for the investment reserve of the transferor to be transferred to the investment reserve of the transferee without triggering a section 83(2B) charge.
  • Proposed new section 211ZA TCGA 1992 permits the transfer of unused allowable (capital) losses from the transferor to the transferee. This was not permitted historically. The requirement for streaming of the losses included in the original 23 December proposals has been dropped.
  • Section 431 of the Taxes Act is proposed to be amended to give effect to the proposals to weight apportionment as between exempt categories of business and taxable categories where a transfer of business takes place part way through a period of account. This eliminates the apportionment benefit of making a business transfer effective at "one minute to" or "one minute past" the end of a period of account.
  • Section 444A of the Taxes Act is proposed to be amended so that the provisions of section 343 are required to be met where losses arising on classes of business which are taxed under Case VI but on Case I principles – pension business, ISA business, overseas life assurance business and life reinsurance business – are transferred from a transferor to a transferee. Such a transfer is restricted to cases where the transferor has at least three-quarters beneficial ownership of the transferee, or the transferee has at least three-quarters ownership of the transferor or some third party has three quarters beneficial ownership of each, as defined for the purposes of ICTA 1988 Section 343. This appears to mean that a transferee cannot use Case VI losses if the transferor has no share capital e.g. is a mutual limited by guarantee or incorporated by statute. However the streaming requirements in the transferee as proposed in the 23 December press release and on which we commented to the Inland Revenue have been dropped.

Chargeable gains and allowable losses

The Finance Bill introduces the following measures:

  • New section 210A of TCGA 1992 (Schedule 33 paragraph 13 to the Bill) sets out rules relating to the ring-fencing of allowable (capital) losses. As proposed in the 23 December press release, only BLAGAB allowable losses are deductible against the policyholder share of BLAGAB chargeable gains. The effect is to prohibit the use of allowable losses arising outside the long term fund against policyholder chargeable gains.
  • Section 210A also deals with the use of BLAGAB allowable losses (allowable losses arising in the long term fund) against chargeable gains arising outside the long term fund. BLAGAB losses may be so used subject to two restrictions:
    • Non-BLAGAB allowable losses must be set against non-BLAGAB chargeable gains before any BLAGAB losses may be set against them (section 210A(4));
    • The BLAGAB losses which may be used are restricted to the shareholders share of those losses (the shareholders share of the excess of BLAGAB losses over BLAGAB gains). Special rules apply to recompute the restriction in respect of brought forward losses (section 210A(5) – (9)).
  • If the policyholder share of profits exceeds the BLAGAB profits, then all of the chargeable gains are treated as policyholder chargeable gains. If the policyholder share of profits is less than the BLAGAB profits, then the policyholders share is calculated using the ratio of the policyholders share to the total (section 210A (10)).
  • The original bed-and-breakfasting proposals are reflected in the Bill, although they have changed substantially and are less draconian than the existing provisions to TCGA 1992 Section 106. It is proposed that a new section 210B (Schedule 33 paragraph 14 to the Bill) will be inserted into TCGA 1992. This will apply to the kinds of asset listed in the table below, but only where such assets are within a "chargeable Section 440A holding", that is to say, are assets linked to BLAGAB or otherwise included in the long term fund. Consequently, the proposed new section 210B will not apply in relation to a security where it can be shown that it is not within the long-term insurance fund at all, but in such a case it is likely that TCGA 1992 Section 106 will apply instead.
  • The effect of the proposed new section 210B is that if
    • the "chargeable Section 440A holding" is reduced by a disposal of securities and the same holding is increased by an acquisition of securities (meaning that the securities disposed of and the securities acquired must be securities of the same class and of the same issuer),
    • the period which elapses between the disposal and acquisition (in whichever order they occur) is 10 days or less and
    • a loss would, but for the section, arise on the disposal,

then the securities disposed of and the securities acquired are identified. The result is, of course, that no loss will arise.

  • There are a number of exceptions:
    • If the disposal and acquisition are on the same day, TCGA 1992 section 105 applies instead of the proposed section 210B;
    • Securities which are the subject of annual marking to market under TCGA 1992 section 212 (units in authorised unit trusts and interests in offshore funds) are excluded;
    • Securities deemed to be disposed of and immediately reacquired under ICTA 1988 Schedule 19AA, paragraph 3 (assets becoming or ceasing to be assets of the overseas life assurance fund) are excluded;
    • If the securities disposed of are linked assets appropriated to an internal linked fund all of whose assets are linked solely to BLAGAB, and the securities are, on acquisition, appropriated to that internal linked fund or another internal linked fund, and the disposal and acquisition are made with a view to adjusting the value of the assets of the internal linked funds concerned, in order to match its or their liabilities, then proposed new section 210B does not apply.
  • Proposed section 210B(3) and (4) contain rules of appropriation by reference to which the identification is to be made, which resemble those of TCGA 1992 section 106(4) and (5).
  • Proposed section 210B will generally have effect in relation to cases where the disposal takes place on or after 23 December 2002. However, a transitional relief is provided in relation to disposals made during the period beginning with 23 December 2002 and ending with 31 December 2002. If it is found that the amount of the allowable losses referable to the company’s life assurance business which, but for the proposed section 210B, would have been £10m or less, the proposed new section will not apply.
  • Section 171A TCGA 1992 will be amended so that it is clear that section 440(3) does not prevent an election under section 171A (whereby an asset is treated as notionally sold to a company in the same chargeable gains group prior to sale outside the group) where the notional transferee is a life insurance company. However the gain or loss will be treated as arising outside the long term fund for the purposes of the ring-fencing rules described in more detail above.

Other changes

Other more minor changes introduced in the Bill are as follows:

  • Amendment is proposed to section 88 FA 1989 and section 88A of that Act has been removed so that the rate of tax on the policyholders share of profits becomes 20%. As a result of the decision to reduce the rate of tax on policyholder chargeable gains to 20%, it was decided that given that the proportion remaining to be taxed at basic rate would be small in most cases, it would be preferable to reduce the rate of tax on all policyholder relevant profits. This takes effect from 1 April 2003 (and therefore for a 31 December 2003 accounting period it will be necessary to apportion between the FY 2002 and FY 2003 to calculate the profits to which the rates should be applied).
  • Sections 88 and 89 FA 1989 are proposed to be redrafted to clarify the meaning of "relevant profits". They are now defined as the aggregate of BLAGAB income and gains, and Case VI profits. Section 89 is also amended so that Case I profits are deducted first against Case VI profits in computing policyholders share of relevant profits, and that BLAGAB charges on income, expenses of management and loan relationship deficits are first set against BLAGAB income and gains.
  • In addition, section 76 of the Taxes Act is proposed to be amended so that not only are expenses of management restricted to the amount of BLAGAB income and gains, but they should be actually offset against BLAGAB income and gains rather than Case VI profits.
  • The original proposal to remove the provisions relating to reservations for policyholders has been withdrawn, and the provision has been recast in proposed new section 82B FA 1989. The new drafting assumes that reservations would only have been in point (and this section will only apply) where the company does not operate an investment reserve.
  • Sections 76 of the Taxes Act and section 89 FA 1989 have been amended so that Case I losses brought forward may be used to reduce the shareholders share of relevant profits. This is applicable only to losses brought forward from the accounting period in which 31 December 2002 is included, or any later accounting period.
  • Sections 804B and 804C of the Taxes Act (double tax relief provisions) have been amended apparently to rectify an anomaly in the allocation of income and expenses between categories of business for the purposes of computing tax credit relief, where apportionment is calculated on the "needs basis" (section 432E). The amendment is intended to prevent the production of a negative figure for a category of business where the total figure is positive.
  • Section 76(2B) and other provisions of the Taxes Act are proposed to be amended to remove outdated references to FIDs and to replace "franked investment income of" with "dividends received by the company from companies resident in the United Kingdom".

Article by Ross Fraser and Lindsay J'Afari-Pak

© Herbert Smith 2003

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