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Chapter and verse

The pre-Budget report in October announced changes to the taxation of life polic-ies which have or accrue a surrender value and are held by companies. They will cease to be subject to the special regime for life policies and will be subject to the corporate loan relationship legislation.

Understanding what happens now will be key.

A company that suffers corporation tax at 21 per cent has an accounting year that runs from May 1 to April 30 and accounts for its assets on a market value basis. It invested £50,000 in a single premium life insurance policy on March 1, 2003, has taken withdrawals each year and the surrender value at April 30, 2008 is £100,000.

Under the new provisions, the policy is deemed to be surrendered in full, realising a Chapter 2 gain of, say, £60,000. This is calculated using the chargeable event regime. This deemed gain is carried forward without incurring any tax liability until a later encashment of the policy occurs.

Under the loan relationship rules, gains will arise every year where the value of the policy increases:

Accounting period May 1, 2008-April 30, 2009
£5,000 withdrawal taken on April 30, 2009
Surrender value immediately before the withdrawal = £110,000
Chapter 2 gain now taxable = withdrawal/surrender value after withdrawal x remaining Chapter 2 gain = £5,000/ £110,000 x £60,000 = £2,728
Corporation tax at 21 per cent = £573
Loan relationship gain = surrender value after withdrawal + withdrawal minus surrender value at start of accounting period = £105,000 + £5,000 – £100,000 = £10,000Corporation tax at 21 per cent = £2,100

In the next accounting period, the Chapter 2 gain of £60,000 which is to be carried forward is reduced by the amount of the carried forward gain already subject to tax (£57,272 for 2009/10).

Accounting period May 1, 2009-April 30, 2010
£5,000 withdrawal taken on April 30, 2010. Surrender value immediately before the withdrawal at April 30, 2009 (say) = £115,500
Corporation tax on Chapter 2 gain = £5,000/£115,500 x £57,272 x 21 per cent = £521
Corporation tax on L/R gain = £110,500 + £5,000 – £105,000 x 21 per cent = £2,205

For the accounting period May 1, 2010-April 30, 2011, a policy surrendered in full on April 30, 2011 for £121,550 would incur corporation tax on a Chapter 2 gain of £11,506 and a corporation tax on L/R gain of £2,321.

The market for corporately owned life policies was previously dominated by offshore bonds and investment criteria based around fixed interest and deposits.

Clearly, paying tax year on year will impact the gross roll-up result. Onshore bonds had not historically been an attractive proposition due to the fact the company would receive no credit for any tax paid in the life fund; in effect, double taxation.

The new legislation recognises this and relief will be given for companies holding policies which suffer life fund taxation.

Policies that can never accrue a surrender value are outside the scope of the legislation but in recent years whole-of-life-type contracts, which do fall under the new rules, have been used extensively.

Advisers could there- fore have a number of clients who are affected by these changes.

The basis of advice in this area has usually been linked to outperforming high- street interest rates. Where a suitable product struc- ture, price and rate can be established using a wrapper to compete against a direct deposit taker, this aspect will still remain.

Also, previous oppor-tunities to offset policy gains in the year where a trading loss has been made, perhaps due to employer pension contributions, will continue. However, policy losses will hence- forth be relievable against trading profits.

Colin Jelley is head of tax and financial planning at Skandia


Enos leaving The Hartford

Hartford Life marketing and distribution managing director John Enos is leaving the company.


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