BN 17 - Life Insurance Companies
Who is likely to be affected?
1. Life insurance companies.
General description of the measures
2. Two measures relating to life insurance companies (measures A and B) were announced on 29 September 2005 (with a further announcement on measure B on 3 November 2005). As a result of consultation undertaken since the announcements, the proposed legislation to implement them has been revised.
3. The Insurance Companies (Corporation Tax Acts) (Amendment) Order 2005
(SI2005/3465) sets out a revised basis for taxing the income and gains attributable
to assets not needed to pay policyholder benefits (the “inherited
estate”) to ensure that, for accounting periods beginning on or after
1 January 2005 and ending before 1 October 2006, such income and gains will
be taxed at normal corporation tax rates. As a result of consultation undertaken
since the laying of the instrument, a further amending instrument will be
laid shortly. In addition, the Finance Bill will
contain a provision extending the effect of the instrument. (Measure C).
4. A further measure will make some technical changes to the corporation
tax and stamp duty land tax (SDLT) rules that apply where there is a transfer
of business in connection with a scheme of demutualisation.
(Measure D).
5. There will also be a consultation exercise looking at a number of issues
which have been identified by practitioners in the insurance industry and
within Government as ones which could simplify the current I minus E system
and remove unnecessary barriers to commercial transactions,
especially business transfers. A consultation document will be issued later
this spring.
Operative date
6. Measures A and B will apply for periods ending on or after 29 September 2005, as announced. Measure C will come into force at Royal Assent and will apply for periods ending after 30 September 2006. Measure D will apply in relation to transfers of business on or after today (but with one aspect backdated to 2 December 2004).
Current law and proposed revisions
7. The measures to be included in the Finance Bill will:
A Provide that any increase in a non-profit life assurance company’s “Form 14 Line 51” entry (the entry in that line of that Form in a company’s periodical return to the FSA) will be brought into account as additional receipts in computing profits, and any decrease as an additional expense.
B Contain provisions which ensure that where there is a reduction of
surplus which represents previously untaxed amounts earned by a mutual
company which has demutualised, an amount equal to the reduction will
be brought into account as income in computing profits. That amount will
not however exceed the amount that is necessary to ensure that the company’s
taxable profit from with-profits business is not less than the transfer
of surplus to shareholders, and in the case
of a 100:0 fund (where all current surplus is allocated to policy holders)
that there is no loss.
C Provide that the amendments made to the apportionment rules by SI 2005/3465 and any subsequent Orders will apply for periods of account ending after 30 September 2006. Further changes to the apportionment rules will be discussed in the consultation document referred to at paragraph 5 above.
D Make a number of changes to the rules applying to transfers of business. This includes a relaxation of the rules governing clawback of group relief for SDLT purposes in connection with a demutualisation, and the removal of a charge to tax if assets are transferred from a company’s long-term insurance fund in consideration of the transferee assuming concomitant liabilities under a loan. Provisions applying where there is a transfer of liabilities which exceed the assets transferred will also be amended to prevent an unintended tax charge arising where the business transferred includes long -term business which is not life assurance business and where the transferee is the reinsurer of the transferor.
Revisions to previously announced measures
8. A full explanatory note was published on 29 September 2005 describing the proposed changes in measures A and B. In the light of representations received from the industry, changes have been made measure B as follows:
- the changes announced on 3 November 2005 are included;
- where a company has received certain injections of capital which increase the “Form 14 Line 51” entry, the amount of that entry will be reduced by the amount of the capital injection represented in that line;
- where a company had a resilience capital amount at the end of 2005, the amount to be brought into account in 2005 will be reduced by that amount, but two thirds of it will be brought into account in 2007 and a further third in 2008; and
- the rules will also cater for transfers of business.
9. In relation to measure A,
- the definition of unappropriated surplus will also include a case where there is an addition to the surplus of the transferee in a demutualisation that was received in connection with the demutualisation. In any such case, the measure will only have effect for periods ending on or after today;
- changes have also been made to clarify the position where unappropriated surplus is held in a non-profit fund.
“Inherited Estate” – measure C
10. Finance (No. 2) Act 2005 contained an amendment to existing regulationmaking powers taking the form of a time-limited power (“sunset clause”). SI2005/3465 was accordingly laid on 16 December 2005 and applies to accounting periods beginning on or after 1 January 2005 and ending before 1 October 2006. The measure in the Finance Bill will simply provide that the amendments made by the Order will continue to apply in the future. A further Order will provide a comprehensive set of rules dealing with corresponding adjustments.
Further advice
11. If you have any questions about this change, please contact Richard Thomas (020 7147 2558) or Colin McHardy (020 7147 2614).
