Developments arising from the ongoing Technical Consultation continue
to dominate the Life Tax landscape.
Amalgamations | Crown Option | FSA Consultation Paper 06/16 | Friendly Societies
| Transfers of Business | Structural Assets | Other announcements | Purchased Life annuities
| Commissions | Repos |
Tax relief on Pension Business
As announced in the PBR, as from 1 January 2007, there will be only one class
of Case VI business representing the gross roll up businesses (PB, OLAB, CTF,
ISA and LRB): PHI will remain a separate schedule D Case I business. The
industry and professional firms have been in negotiations with HMRC regarding
the detailed changes which are required to the legislation to implement the
In summary the legislation will provide
That all gross classes of business are amalgamated for all accounting
periods starting after 1 January 2007
The concept of the OLAF assets will disappear – but certain assets which
are currently OLAF will be able to be wholly included GRB
Reassured OLAB business will become LRB – which is part of GRB – this
will require amendment to FSA returns. This is because currently, OLAB in
the FSA returns is based on the tax definition
Assets which move boxes will do so at market value at the start of the
accounting period – usually 1 January 2007
Pension losses brought forward will be streamed, the utilisation will
depend on the ratio of the Pension liabilities to total liabilities. Other
GRB losses will not be subject to streaming.
The allocation rules will be simplified to reflect the amalgamations of
Capital allowances for management assets will continue to be allocated
prorata to liabilities. The review of this allocation method will be
discussed in the apportionments work stream.
The changes will simplify computations and many of the issues identified at
the time at the PBR have been satisfactorily resolved.
At the time of the Pre Budget report on December 2006, HMRC confirmed that
the industry working party reviewing this aspect of the Life Technical
Consultation Document were working towards a practical solution that removed the
uncertainty of the current regime. Despite guidance in the LAM on when HMRC
would seek to exercise its option to tax life companies on an actual Case I
basis, this eventuality is most likely to be the result of protracted
negotiation. More importantly, in the event a change in tax base occurs, there
is the likelihood that significant tax loss attributes arising under the I minus
E regime are lost.
The options were to either enshrine the current LAM guidance in statute or to
adopt a notional income approach. The latter approach is proposed as, on
balance, it should provide a mechanistic and practical regime for life insurers.
Draft legislation is currently being finalised, with full input from the
industry working party, for publication as a Schedule to the Finance Bill.
Instead of restricting management expenses, for accounting periods beginning
on or after 1 January 2007, when the I minus E result is less than the NCI
amount, notional income (the ‘excess Case I profit’) will be added to the
taxable I minus E result to equalise it. In subsequent accounting periods, the
excess Case I profit will be deductible in arriving at the I minus E result,
provided I minus E does not reduce below the NCI measure of taxable profit.
Pure reinsurers will continue to be taxed on an actual Case I basis. In
addition, companies that comprise mainly gross roll up business for an
accounting period will be taxed on an actual Case I basis.
It is anticipated that the draft legislation will ensure tax reliefs are
preserved, either on entry to the new regime or arising from a change in basis
to actual Case I.
Significant work has been undertaken to develop a coherent regime that
provides certainty of operation and, wherever possible, preserves tax reliefs.
Two notable transitional reliefs are the conversion of Case VI losses to Case
I on a permanent change in basis, for example a pension company entering the new
regime, and the reinstatement of excess E lost on a previous exercise of the
Crown Option when the company moves back to I minus E.
In addition, the legislation will have a ‘carve out’ power to spread excess
case I profits to “cater for commercial or regulatory events”. This is intended
to deal with future changes similar to the effect of CP 06/16. To ensure the
‘certainty’ benefit of the new regime is not diluted it will be important that
the circumstances when HMRC use this power are clearly understood.
FSA Consultation Paper 06/16
The effect of CP 06/16 is to allow life companies to change their reserving
calculations and emerge additional FSA return profit in 2006, should they wish
to do so. Regulations were laid in December 2006 to ensure the substantively
enacted test was met for 2006 financial reporting purposes with regard to the
intended tax treatment of such adjustments.
Since December further work has been undertaken to develop further
Regulations (to be laid shortly) to ensure profits arising as a result of CP
06/16 valuation adjustments and deferred to later years unwind properly, even if
there are subsequent period valuation adjustments under CP 06/16.
It is encouraging that both HMRC and Industry have been prepared to move
swiftly to address real practical issues on this matter.
The Pre Budget Report considered a number of measures relevant to Friendly
Societies and proposals together with draft legislation were announced to allow
the transfer to life insurance companies of tax exempt life or endowment
business. Subsequent consultation has resulted in an acceleration of the
proposals with the effective date advancing to Royal Assent rather than 1
Since PBR, progress has been made on other areas.
Draft legislation will be published in the Bill to allow Friendly
Societies to transfer tax exempt other business to life companies. The rules
will mirror those for tax exempt life or endowment transfers whereby the
exemption will be preserved provided there is no increase in policy benefits
Changes to the tax exemption rules will be made to ensure the assignment
of tax exempt policies does not result in the inadvertent loss of tax exempt
status, for example assignment on divorce or settlement.
Good progress has been made on these issues and it is encouraging that the
operative date for a more flexible transfer regime has been brought forward.
However, developing a simplified tax regime for smaller societies is proving
Transfers of Business
HMRC has responded to industry concerns that, despite significant progress to
date, elements of the proposed new regime covering Transfers of Insurance
Business require further work before they are ready to be introduced in
legislation. Confirmation has been given today that limited primary legislation
will be introduced in this year’s Finance Bill, with most of the substantial
changes (in particular affecting the ‘shareholder’ tax position) to be made
under Regulations. HMRC has sought to allay industry concerns at such an
extensive use of secondary legislation by allowing for the possibility of
Parliamentary debate, and time-barring the Regulations to 1 April 2008. The
overall expectation continues to be of a rationalisation of the
charging/relieving provisions in respect of ‘shareholder’ tax in conjunction
with a Targeted Anti-Avoidance Rule. The commencement date is to be determined,
but is likely to be later than the initial target of 1 November 2007 (possibly
February/March 2008?). For those who have been following the consultation
process closely, particularly welcome are the announcements that proposed
s.444ACZA (imposing a charge where liabilities in excess of assets are
transferred), and the ‘capital addition’ restriction to the relief for surplus
transferred under proposed new s.444AC, have been abandoned.
HMRC has confirmed that the tax treatment of certain Structural Assets of
long-term funds will be amended, so that they are treated in effect entirely as
shareholder fund CGT assets. The changes will potentially impact structural
assets held by non-profit funds where there is a difference between the value of
the asset for regulatory purposes and its cost to the fund (although only
write-downs are mentioned, it is expected that previous write-ups will also be
included). The changes are expected to have effect for 2007 accounting periods
and following. Despite industry representations, HMRC has made it clear that the
definition of Structural Assets will include certain loan arrangements.
HMRC has also noted that ‘other valuation issues’ (arising from the
regulatory value rules) will be the subject of further discussion. Many of those
involved in the consultation had hoped that the Structural Assets changes might
address HMRC’s concerns in this area.
The date from which Section 83(3) Finance Act 1989 (a particularly
unpopular anti-avoidance measure which can operate to reduce or eliminate losses
where amounts have been added to the long-term fund in connection with a
transfer of business or demutualisation) will cease to operate is now ‘to be
determined’, but may be aligned with the commencement date for the Transfers
There will be provisions to mitigate ‘clogged’ capital loss issues
where there are disposals of OEIC/unit trust holdings between an insurer and a
Changes have been announced to the contingent loan legislation, along the
lines of draft legislation recently circulated by HMRC for comment. The drafts
also included similar proposals in relation to financing reinsurance and certain
other additions to the long-term fund (“contributions to operations”), which
HMRC has now signalled will be discussed alongside the consultation on
Insurance SPVs. It is interesting to note that, per the Red book, these
financing measures are estimated to raise £120m-£165m pa.
Purchased Life annuities
Currently HMRC have to agree the proportion of capital for a purchased life
annuity. This will be replaced by regulatory powers setting out how to calculate
the proportion. There will be discussions with the industry before any change is
Certain IFAs have been selling life policies and rebating commission to
policyholders. The claim has been made under SP4/97 that the commissions are not
taxable. As from today, new rules apply to policies sold which have a premium in
excess of £100,000 which are surrendered, matured or assigned for money’s worth
within three years; any commissions rebated will need to be included in the
chargeable events calculation. HMRC have accepted industry representation that
the life companies may well be unaware of such rebates and therefore the life
companies will continue to calculate chargeable events on current basis. It will
be incumbent on the policyholders to report any such rebates in their tax
returns. HMRC are also taking regulatory powers to amend the limits of £100,000
and also to prevent disaggregating of policies to avoid this legislation.
The new regime for Repos will firmly link the tax treatment of repos with the
accounting treatment. There are currently tax consultations taking place to
ensure that this does not result in unforeseen circumstances. As many companies
will use Repos as a management tool – it will be important that insurances
companies are fully involved in such consultation.
Tax relief on Pension Business
In the PBR tax relief on pension payments made by individuals was removed for
policies which were life cover and had little or no investment content. Despite
extensive lobbying there has been no change in the view that there will be no
tax relief for such policies and this has been extended to group policies - this
latter change comes in as of today . It does not impact the tax deduction for
the employers and the business is still pension business within the life
This is very disappointing outcome of the consultation and the regulatory
assessment appears to have completely missed the interaction with the corporate
tax position of the company.
The Technical Consultation process continues to be constructive, and
some of today’s announcements are welcome. However, groups will need to continue
to prioritise devoting resource in coming months to carry out proper impact
assessments. The changes in respect of commission rebates are not unexpected,
but HMRC’s refusal to relent on the availability of tax relief on pension term
assurance is disappointing.