Ministerial statement on “Investment Reserves” of non-profit funds - Mazars - United Kingdom
Ministerial statement on “Investment Reserves” of non-profit funds
Where it is necessary to calculate the profits of a life insurance company on a “trading” basis, either to equalise its charge to tax under the I-E regime or to calculate the profits available to its gross roll-up business, a starting point for calculating those profits is normally Form 40 of the FSA return.
A life insurance company is able, by way of a “book value” election, not to bring into account in Form 40 of its FSA return all increases in the value of its assets. The difference is cumulatively reflected at Line 51 of Form 14 and has been traditionally known as the “investment reserve.”
HMRC consider the resulting postponement in the emergence of trading profit, which may be indefinite, to be fair in the case of with-profits business, where “smoothing” is an integral part of the business and large inherited estates build up.
Where non-profit business is concerned, HMRC considers this to be an unfair tax shelter. It has therefore brought in legislation to address it since 2005, effectively bringing amounts out of the shelter and back within the calculation of tax profits.
The 2005 change concerned only “non-profit” companies where at the end of a period of account none or only an insignificant proportion of the liabilities were with-profits, which meant that non-profits funds in companies writing significant with-profits business were excluded.
The 2009 change is described under the heading Addition to the Long Term Insurance Fund: Not s83(3) Finance Act 1989 in our Budget 2009 section.
Despite the legislation there is still scope for certain amounts to remain sheltered until they are brought into account in Form 40.
HMRC have noticed however that certain life offices have been able to manipulate their mix of business so that when the amounts do get brought back into account, they fall out of charge to tax together, resulting in a loss of hundreds of millions to the Exchequer.
The Government has now decided to introduce legislation to prevent such manipulation in the future, and consider whether retrospective legislation is necessary.
It is intended that in the future profits of non-profit business will be taxed as they arise.
It is proposed to “fix” tax on current investment reserves so that they will reflect the mix of business in 2009 as and when they are brought into account.
The measure will be subject to consultation regarding the precise method.
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