Finance Bill Tracking Service 2007 | Budget 2007 | Budget Notes

BN32 Life Insurance Companies: consultation outcomes

Who is likely to be affected?

1   Life insurance companies and friendly societies writing life assurance business.

General description of the measures

2   In May 2006, HM Revenue & Customs (HMRC) published "Life Assurance Company Taxation: A Technical Consultative Document" to solicit views on how to simplify certain aspects of the tax law relating to life insurance companies. The consultation was divided into five strands and for each of them a working group was established consisting of HMRC officials and representatives from the insurance industry and its advisers. The measures announced today are further products of that work. Consultation continues on the detail of these measures as well as the measures announced at 2006 Pre-Budget Report and on other issues identified by he consultation process.

3   Legislation will be introduced in Finance Bill 2007 to:

•   set out the circumstances in which the profits of a life insurance company will be charged to corporation tax under Case I of Schedule D, rather than under the "I minus E" basis normally applying to such companies;

•   modify the treatment of structural assets held by life insurance companies;

•   remove restrictions on the utilisation of allowable losses where a life insurance company disposes of units in authorised investment funds (AIFs) to a connected AIF manager; and

•   allow tax exemption to be retained after the transfer of existing tax exempt business which is not life assurance business from friendly societies to life insurance companies.

Operative date

4   The transfer of friendly society business measure will have effect where a transfer takes place on or after the date that Finance Bill 2007 receives Royal Assent. The remaining measures will have effect for periods of account beginning on or after 1 January 2007.

Current law and proposed revisions

5   Currently HMRC has the right to choose (the "Crown option") to require a life insurance company to return its profits for tax purposes computed in accordance with the provisions of Case I of Schedule D or in accordance with the so called I minus E basis. In practice most life insurers are taxed on the I minus E basis, with the Case I basis being invoked only in exceptional circumstances or for insurers only writing certain classes of business, for example pension business, for which the I minus E is not ppropriate.

6   In response to concerns raised by the insurance industry, the Crown option will be replaced with new rules to be set out in Finance Bill legislation which will make it certain when life insurance companies will be assessed on a Case I basis. There will also be changes to the I minus E basis which will ensure that tax is always paid on the higher of the profit computed on a Case I basis and that computed under the I minus E basis. The difference will be added to the I minus E basis profit. Other changes will ensure that the tax treatment applying when a company moves in future from one basis to the other (whether as a result of the changes to the Crown option or otherwise) is consistent and results in losses and other amounts not being permanently lost.

7   "Structural" assets are assets which are part of a life insurer's infrastructure rather than assets held to be turned over in the course of the insurer's trade. Examples include subsidiaries of a life insurance company which themselves write insurance business. However many structural assets are held in a life insurer's long-term insurance fund (LTIF) and in consequence are taxed as if they are trading assets rather than structural assets. This has the result that dividends from such subsidiaries of life insurers are charged to corporation tax, whereas dividends from structural subsidiaries of other financial traders would be exempt. On the other hand, life insurers can claim tax relief for write-downs in the value of structural assets which arise from the prudent valuation rules used for egulatory purposes, and which do not represent an economic loss.

8   Accordingly the treatment of structural assets held in the non-profit fund of the LTIF will be modified to remove income and changes in value from a computation of profits in accordance with the provisions of Case I of Schedule D. Structural assets will be defined in Finance Bill 2007 to include insurance dependents. The inclusion of a regulation-making power in Finance Bill legislation will allow further types of asset to be added by regulations, as required. The descriptions of assets to be included by regulations will be discussed with the insurance industry. There will be transitional rules to prevent write-downs made before periods beginning on or after 1 January 2007 having permanent effect for tax purposes.

9   Where a loss results from the disposal of an asset by one company to another connected company, relief for the loss against chargeable gains, under the Taxation of Chargeable Gains Act 1992, is restricted to set off against gains arising on disposals between the same connected parties. This is an anti-avoidance rule which recognises that connected parties may have scope to manipulate the circumstances of a disposal. However this rule can operate unfairly for life insurers where they dispose of units in authorised unit trusts and OEICs managed by a company which is a member of the same group. Such disposals must take place at fair value for regulatory reasons. In addition a life insurer is treated as disposing each year, for their market value, of its holdings in unit trusts and OEICs. Because of this it is unfair to restrict the losses arising. Accordingly the estrictions on losses arising in these circumstances will be removed.

10 Currently if a friendly society transfers tax exempt business which is not life assurance business, for example permanent health insurance or sickness business, to an insurance company, tax exemption is lost in respect of the transferred business. This can act as a disincentive to consolidation, inhibiting efficiency gains and policy holder benefit improvements within the sector. Accordingly the law will be changed to permit tax exemption to be maintained if a friendly society transfers its existing tax exempt non-life business to an insurance company. However the exemption will be lost if there is any increase in the scale of benefits offered after transfer. Also the law will be relaxed to prevent the loss of tax exemption where premium limits are unwittingly breached, for example following assignment of policies on divorce.

Further advice

11 If you have any questions about these changes, please contact Richard Thomas on 020 7147 2558 ( or Colin McHardy on 020 7147 2614 ( Information about Budget measures is available on the HM Revenue & Customs website at