Budget 2009: Life Insurance - Mazars - United Kingdom
Budget 2009: Life Insurance
Addition to the Long Term Insurance Fund: Not s83(3) Finance Act 1989.
S83(3) of the Finance Act 1989 was a troublesome provision aimed to prevent life offices acquiring a new business stream from generating a trading loss on resulting expenditure which was funded with capital contributions from the company and should properly be part of acquisition costs.
In fact, because of the difficulty in pinpointing the circumstances in which this happened, it extended far wider than necessary and for a long time, until its permanent abolition last year, caused considerable difficulties for life insurance companies injecting capital into to the long term insurance fund to secure solvency on the occasion of transfers of business and demutualisations.
HMRC had indicated that as from 2009, it would replace published guidance on additions to the long term insurance fund in general with legislation, to ensure certainty on the matter.
Draft legislation in the Finance Bill, introducing a new s83(2AZA) into the Finance Act 1989, now makes it clear that transfers to the Long Term Insurance Fund from the non-technical account are not taxable receipts.
There is however a new anti-avoidance provision, s432AZA, preventing trading losses from being deductible against non-life insurance company profits or being surrendered as group relief if they arise in the same accounting period as, or following, an addition to a non-profit fund, and there is either a book value election or arrangements whose purpose is to reduce the admissible value of assets. The logic here is that a book value election or a reduction in admissible value can reduce trading profits for tax purposes, and the hole left in the Long Term Insurance Fund could be plugged by a non-taxable transfer of capital from non-technical account.
There are already rules restricting the ability of book value elections and admissibility write-downs to reduce trading profits and therefore the draft provisions only cover those accounting measures which are not already caught by existing legislation. Accordingly:-
- Non-profit companies (i.e. companies carrying on long term business where none of the liabilities or none but an insignificant proportion of those liabilities are with-profits) are already prevented from sheltering their profits by way of a book value election. The draft legislation therefore only applies to non-profit funds of companies which have significant with-profits liabilities and would otherwise be able to shelter their profits indefinitely by way of a book value election. This includes the non-profit part of a with-profits fund, although it does not apply to a non-profit fund required to support a with-profits fund.
- Admissibility write-downs (and write-ups) on the shares, debts and loans of insurance dependents treated as structural assets are already ignored in the calculation of trading profits and therefore the rules do not apply to those.
It should be noted that the reduction in losses triggered by this provision will not prevent those losses from being carried forward against future life insurance profits prepared under trading principles.
The new legislation is intended to apply to accounting periods ending on or after 22 April 2009, in respect of additions made on or after that date.
This means that the current accounting periods of life insurance companies with 31 March and 31 December year ends are affected.
Deduction of amounts allocated to policyholders
Legislation will be introduced to restrict the tax deduction for accounting periods ending on or after 22 April 2009 of allocations to policyholders on or after 22 April 2009 in so far they may be capital in nature or be made to facilitate an attribution of inherited estate and the amounts allocated are not funded out of taxable income.
The aim is to prevent the artificial creation of deductible losses by proprietary life offices.
Contingent loans: Defect in transitional rules to be corrected
Last year’s Budget repealed the rules relating to contingent loan advances made to life insurance companies for periods of account beginning on or after 1 January 2008. Instead, contingent loans are now covered by the wider legislation on Financing Arrangement Funded Transfers (“FAFTs”). Like the contingent loan legislation, the rules recognise the fact that financial engineering based on the emergence of future surplus has a genuine business financing function, but aims to tax situations where in fact those arrangements are used to realise the value of the future surplus for shareholders.
Contingent loans entered into for periods of account beginning before 1 January 2008 are now within the new regime. Transitional rules were therefore necessary for amounts disallowed under the old regime to be deductible when repaid within the framework of the new regime. The amount deductible should be the amount repaid net of amounts already allowed.
There was unfortunately a defect in those transitional rules which results in the legislation working contrary to what is intended, producing a deduction of NIL. This defect was brought to the attention of HMRC, who acknowledged it and have now formally announced that it would be corrected, affording certainty for companies preparing their tax provisions for the year ended 31 December 2008.
New s171A TCGA 1992
The ability for group companies to transfer gains and losses between each other will extend to life insurance companies, but not to their long term insurance funds. This is in line with the current provision for notional transfers.
This means that gains and losses attributable to the shareholder fund of the company in which the gain or loss originated will be transferable, and a life insurance company to which a gain or loss is transferred to will be able to treat it as a gain or loss of its shareholder fund.
Changes to the Floor calculation to amend a distortion relating to foreign business assets
HMRC noticed a defect in the legislation causing an unintended distortion in the Floor calculation required for the allocation of investment returns to the gross roll up business of with-profits funds.
This will be amended for accounting periods beginning on or after 1 January 2009 and ending on or after 22 April 2009.
Value shifting and transfers of business
A material reduction in the value of shares in a company due to the transfer of an asset at an undervalue may trigger the value shifting rules relating to tax on chargeable gains.
HMRC have announced that those rules will not apply to a reduction due to the transfer of life assurance business between group companies on or after 22 April 2009, provided that the transfer is not part of a tax avoidance arrangement.
This proposal is likely to be relevant mainly to companies liquidating shares in a subsidiary that is no longer active, outside the scope of the substantial shareholdings exemption.
Solvency II
The EU Solvency II regulatory Directive (“Solvency II”) - expected to come into force in 2012, or shortly after Solvency II Directive is likely to result in radical changes to the returns made under the FSA’s regulatory reporting regime upon which life tax computations depend. HMRC is undertaking consultation with the industry to address the tax consequences of those changes.
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