Global > United Kingdom >  Services > Tax > Budget 2007 > Life insurance
 

Life insurance

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

Amalgamations

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 changes.

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 the businesses.

• 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.

Top

Crown Option

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.

Top

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.

Top

Friendly Societies

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 November 2007.

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 or premiums.

• 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 elusive.

Top

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.

Top

Structural Assets

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.

Top

Other announcements

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 changes.

There will be provisions to mitigate ‘clogged’ capital loss issues where there are disposals of OEIC/unit trust holdings between an insurer and a connected manager.
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.

Top

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 implemented.

Top

Commissions

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.

Top

Repos

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.

Top

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 company.

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.

Top