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Foreign Profits
Solvency II
Life Insurance
Life Investment and Operational
General Insurance
Indirect Tax

 

Introduction

So far as insurance-specific measures are concerned, today's Budget brings few surprises. There is a package of measures from the ongoing life assurance consultation, and two changes to the taxation of Lloyd's corporate members.

Other measures which will be of interest to life assurance companies primarily impact on investments, systems and administration (e.g. of pensions and chargeable events). We expect the Finance Bill to be published on 30 April 2009.

Foreign Profits

The Foreign Profits package is being introduced with some changes. The exemption for most dividends and the changes to the controlled foreign companies rules will apply from 1 July 2009, and the worldwide debt cap will apply to accounting periods beginning on or after 1 January 2010.

There will be an exclusion from the worldwide debt cap for financial services groups, including insurance groups, although the detail of this is not settled. More information should become available shortly.

Solvency II

HM Revenue & Customs have noted that the regulatory rules for insurance companies under the Solvency II Directive (expected to be introduced around 2012) are likely to mean that insurers will not be required to maintain claims equalisation reserves, for which they are currently able to claim tax relief. The Directive is also likely to have significant implications for the FSA regulatory return on which life company tax computations are based.

HMRC have stated that the Government is determined to have a tax regime that will support the competitiveness of the insurance industry, and will continue to engage with the industry on the implications of Solvency II.

Life Insurance

For life companies, new measures are proposed (as expected) in connection with a number of areas:

• additions to long term funds;
• restrictions on relief for amounts allocated to policyholders;
• FAFTS legislation;
• Foreign Business Assets and the 'floor'; and
• value shifting and transfers of business.

 

Additions to Long Term Funds

Paragraph 6.57 of the Life Assurance Manual, which sets out HMRC's views on the circumstances in which additions to the long term fund may be taxable, is to be replaced by legislation. No amount shown as a transfer from the non-technical account, in line 32 of Form 58 in respect of the whole of a company's long-term business, is to be taken into account for the purposes of section 83 FA 1989.

Measures are also to be introduced to limit relief (against the company's other profits or by way of group relief) for losses incurred by a life company which is not a non-profit company, where there has been a transfer from the non-technical account to a non-profit fund and certain conditions are met. The proposed legislation will not affect the use of losses arising in with-profits funds or non-profit funds which support with-profits funds.

Both measures are proposed to have effect for accounting periods ending on or after 22 April 2009 in respect of additions made on or after 22 April 2009.

 

Restrictions on relief for amounts allocated to policyholders

Under current legislation, generally sums allocated to policyholders are deductible in Case I and Case VI computations. Section 82 FA 1989 is to be amended to disallow deductions for amounts of a capital nature allocated to with-profits policyholders, where the amounts allocated are not funded from amounts brought into account as part of total income in a Form 40 revenue account in respect of the whole of a company's long term business. Specifically, payments made in connection with the reattribution of inherited estate are to be regarded as capital in nature for these purposes. The restrictions are proposed to apply to amounts allocated on or after 22 April 2009.

 

FAFTS legislation - contingent loans transitional provisions

The FAFTS legislation introduced in 2008 is to be amended with retrospective effect to correct defects in the way it currently operates for companies which had unrepaid contingent loan liabilities prior to the commencement of the legislation.

 

Foreign Business Assets and the 'floor'

The calculation of the floor in section 432E TA 1988 is to be amended to remove unintended distortions introduced in 2008 in relation to Foreign Business Assets. It is proposed that the changes will have effect for accounting periods beginning on or after 1 January 2009 and ending on or after 22 April 2009. Discussions are ongoing with HMRC regarding the approach for accounting periods beginning on or after 1 January 2008.

 

Value shifting and transfers of business

The exception in section 32 TCGA 1992 from the value shifting anti-avoidance rules for transfers within a group falling within section 171(1) TCGA 1992 is to be extended to apply to intra-group transfers of life assurance business. The amendment will apply in determining whether the value shifting rules apply to disposals on or after 22 April 2009.

 

Transfer of business between mutual societies

Under current legislation different taxation consequences can arise depending upon whether a transfer of business is between two mutual societies versus to a company, and depending upon the type of mutual society involved. Finance Bill 2009 will introduce a power to make regulations to ensure that where possible equivalent taxation treatment applies, and to provide certainty where the current rules are unclear. The changes could affect mutual insurers and friendly societies looking to rationalise or to merge with other bodies.

Life Investment and Operational

The 2009 Budget brings with it a number of tax changes which are relevant to the administration of life tax companies. In the funds area there are considerable changes.

 

Offshore Funds

The offshore funds legislation is to be amended for individuals so that an interest in a tax transparent offshore fund will be treated as a capital gains tax asset rather than an interest in the underlying assets on a look-through basis. HMRC will be discussing with corporate tax investors (which will include life companies) how to implement similar changes for companies.

The legislation will be amended by regulation to treat offshore funds as reporting or non-reporting funds. It is understood that the rules which currently treat offshore funds as section 212 TCGA 1992 (deemed disposals) capital gains assets will remain in place.

 

Tax Exempt Funds

If a fund so elects, it will be able to stream income into different categories. The corporate streaming rules will not apply to these funds. However, whilst this is beneficial for individuals and pension schemes, as life companies already have corporate streaming rules they may not wish to participate in such funds.

 

Investment Trusts

As from 1 September 2009 investment trusts will be able to pay interest distributions. Life companies with investments in such funds will need to identify such income streams and ensure they are treated as taxable rather than as dividend income.

 

Foreign Profits

As from 1 July 2009 most dividends from UK or overseas companies will be exempt in respect of BLAGAB and the BLAGAB shareholders' share of dividends when calculating the Notional Case I result. The implications are:

• companies will have to change their systems, including unit pricing systems, to ensure the dividends are identified as exempt;
• withholding tax associated with the dividends will need to be written off;
• the NCI calculation methodology will need to be updated.

It should be noted that corporate streaming rules will still apply to OEICs and unit trust dividends paid to life companies. Dividends received from such funds with substantial amounts of foreign dividends are likely now to be mostly FII rather than UFII and therefore will not carry the notional tax credit. If currently these tax credits have been utilised to offset tax payable on CT61s or quarterly payments on account, companies will need to review their procedures. In addition, if any of the business is pension business companies will need to consider the impact on unit pricing if they have been giving the deemed credit to policyholders.

 

Financial Services Compensation Scheme (FSCS)

If a policyholder receives payments from FSCS, the Finance Bill will provide powers so that any payment from FSCS is treated as if it had been received from the life company. Without this change, in particular, payments in respect of pension business could have been treated as unauthorised pension payments.

 

Additional Rate of Tax

There will be a significant impact on life companies as they will have to review their investment bond literature and whether products are suitable because:

• chargeable events could be taxed at rates of up to 60% for those earning over £100,000, where the personal allowances are being withdrawn on a £1 for £2 basis; and
• individuals' income in excess of £150,000 will be taxed at 50%.

 

Life Insurance

From 6 April 2009, losses on offshore life policies cannot be offset against gains from other income. There had been exploitation of a perceived loophole which arose as a result of ITA 2007. The HMRC view is that there is no loophole, but they have changed the legislation to make it clear that losses on offshore life policies cannot be used against other income and any brought forward losses at 6 April 2009 are also lost.

 

Pension changes

As from 2011/12 tax relief for pension contributions will be restricted for those earning more than £150,000, tapering to a 20% level of relief. There are anti-forestalling provisions with effect from 22 April 2009. For individuals whose income is above £150,000, who change their regular pension savings and whose total pension savings are above £20,000 a year, there will be a special charge. ive effect to correct defects in the way it currently operates for companies which had unrepaid contingent loan liabilities prior to the commencement of the legislation.

General Insurance

There are no corporation tax measures that are specific to general insurance. We understand that HMRC are working on a further draft of Regulations under Schedule 11 to FA 2007 to limit the amount of tax deductions for technical reserves.

 

Lloyd's Dividend exemption

Dividends received by companies that are Lloyd's corporate members will be exempt from corporation tax from 1 July 2009. This will bring them into line with other UK general insurance companies.

Claims equalisation reserves

As announced in the 2008 Pre-Budget Report, tax relief will be given for a form of claims equalisation reserve for Lloyd's corporate members, including SLPs and LLPs. The rules will operate in a way broadly similar to the current rules for other general insurance companies and will apply to results declared in 2008 onwards.

 

Indirect Tax

 

VAT

Some changes are being made to the place and time of supply rules with effect from 1 January 2010. In the rare case where an insurance intermediary is acting as agent for the insurer, rather than for the policyholder, the place of supply will move to where the insurer is located.

 

Insurance Premium Tax

The time limits for IPT claims and assessments will be aligned with those for other taxes. The time limit is extended from three to four years, except in the case of a deliberate mistake where HMRC have 20 years to make an assessment. There are also changes to record keeping requirements and new information and inspection powers. These changes have been subject to consultation and take effect from 1 April 2010.

Two Extra Statutory Concessions are removed with effect from 1 April 2010 as not needed. The first allows a choice between accounting schemes on pre-1994 policies and the second clarifies the treatment of premiums paid under home contents policies arranged by suppliers of domestic appliances. This will be replaced by guidance.