Finance Bill Tracking Service 2007 | Budget 2007 | Budget Notes

BN33 Life Insurance Companies: financing arrangements

Who is likely to be affected?

1   Life insurance companies entering into financing arrangements such as contingent loans and financial reinsurance contracts.

General description of the measure

2   Life insurance companies have requirements for capital which cannot normally be met by straightforward borrowing. Instead life insurance companies have used a variety of more complex arrangements including contingent loans and financial reinsurance contracts to meet these requirements. Legislation will be introduced in Finance Bill 2007 to simplify and strengthen the tax law relating to some of these arrangements, and discussions will continue about others in the course of ongoing consultation on life assurance company taxation.

Operative date

3   The new rules will have effect for periods of account beginning on or after 1 January 2007.

Current law and proposed revisions

4   Some financing arrangements have been seen by HM Revenue and Customs which have been used to generate profits without tax being paid on them, instead of contributing to working capital.

5   Legislation introduced in Finance Act (FA) 2003 sought to give an appropriate tax treatment for contingent loans, one of these types of arrangement. The legislation, in section 83ZA FA 1989, is complex and mechanical in seeking to distinguish cases where there is tax avoidance from those where there is not. A flaw in this legislation has come to light as a result of disclosures under the legislation in Part 7 of FA 2004. In addition other legislation, in section 82C FA 1989 and elsewhere, sought to distinguish the use of financial reinsurance contracts for avoidance purposes but may have had the effect of discouraging them for normal financing purposes.

6   Legislation will be introduced in Finance Bill 2007 to reform the treatment of contingent loans. It will impose a tax charge only when the arrangements are used to generate a transfer of surplus to shareholders which would not have existed without the arrangements, or which exceeds 125% of the mean of transfers in the three previous periods. It will also recognise that where such surplus is generated and brought into account for tax, a compensating adjustment may be needed in later periods. This change will rectify the flaw in section 83ZA FA 2004. In addition there will be consultation on the possibility of giving other types of financing arrangements such as financial reinsurance and capital contributions the same tax treatment as contingent loans.

Further advice

7   If you have any questions about this change, please contact Richard Thomas on 020 7147 2558 ( Information about Budget measures is available on the HM Revenue & Customs website at