Budget Notes

BN37 LIFE INSURANCE COMPANIES: INTEREST APPORTIONMENT

Who is likely to be affected?

1. Companies carrying on life insurance business.

General description of the measure

2. The measure will ensure that interest paid by insurance companies on amounts deposited back with them by re-insurers will be apportioned appropriately between different categories of business for corporation tax purposes.

Operative date

3. The measure will have effect for periods beginning on or after 1 January 2008 and ending on or after 12 March 2008.

Current law and proposed revisions

4. It is common practice for life insurance companies to reinsure large blocks of pension annuities in payment to specialist providers who are better able to manage the longevity risk attached to such business. Because pension annuities are long-term contracts, such reinsurance arrangements can result in a substantial credit risk for the insurer. To manage that credit risk, it is normal practice for the re-insurer to deposit back all or a substantial portion of the premium paid with the original insurer. It is also normal practice for the original insurer to pay interest to the re-insurer on that deposit back. As the deposit back liability replaces the reinsured liability in the insurer's apportionment computations, any income arising from the deposit-back will be allocated to a company's gross roll-up business (GRB), the category which includes pension business.

5. Even though the deposit back is entirely related to GRB, interest paid on the deposit back is apportioned between GRB and basic life assurance and general annuity business (BLAGAB). This means that a significant proportion of the deposit back interest may be relieved against BLAGAB income and gains. For a variety of reasons this may result in an unintended tax advantage for companies.

6. Finance Bill 2008 will introduce legislation to provide that interest paid on deposits back from re-insurers will be wholly allocated to the category or categories of business reinsured by the contract giving rise to the deposit back.

Further advice

7. If you have any questions about this change, please contact Richard Thomas on 020 7147 2558 (email: richard.thomas@hmrc.gsi.gov.uk) or Colin McHardy on 020 7147 2614 (email colin.mchardy@hmrc.gsi.gov.uk). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk