View more on these topics

Historic events

In this last in the series on the taxation of investment life insurance policies effected by companies, I would like to look specifically at how the new loan relationship rules are applied when the investing company adopts an historic cost basis of accounting in respect of the investment. I looked last week at how the fair value basis operates. The Finance Act anticipates both bases.

Where the historic cost basis is adopted, an investment life insurance contract will be taxed as follows:

  • There will be no non-trading credit arising by virtue of an increase in the actual (surrender) value of the policy in any year, so no charge to corporation tax can arise under the loan relationship rules until a related transaction, such as full surrender or part-surrender, takes place.

  • This means that a charge to corporation tax will not arise until an actual full encashment or part-encashment of the policy takes place, when the real realised gain will be subject to corporation tax as an NTC.

  • For a policy with a UK insurer, or one with an EEA insurer that has suffered a comparable tax charge on the underlying fund, at the time of the related transaction, the NTC will be increased and the corporation tax assessable on the company will be reduced by the increase resulting from the formula in para 3(3) Sch 13 Finance Act 2008.

    In other words, if an historic cost basis of accounting is adopted:

  • A deemed chargeable- event gain will be avoided when the policy comes into the loan relationship rules.

  • There will be no future NTCs year on year under the loan relationship rules.

  • A tax liability can arise only when full encashment or part-encashment takes place. At this point, there will be the usual grossing up and credit process for a UK or EEA comparable rate policy.

    For companies which owned policies before the beginning of the first accounting period starting after March 31, 2008 and are assessed on the historic cost basis, there will be no deemed chargeable-event gain at the commencement of the first accounting period starting after March 31, 2008. This is because the measure of the deemed gain is the carrying value for accounting purposes which will be the historic cost.

    On a related transaction, such as final surrender, the gain (NTC) will be measured by deducting the original investment (historic cost) from the amount realised from the full encashment. The whole of the NTC derived on final surrender will be grossed up by 20 per cent, even though some of it could be derived from the period before the loan relationship rules came into effect.

    For example, Richards Ltd, whose accounting period runs from September 1 to August 31, effected an investment bond policy with the Stone Roller UK insurance company on May 1, 2001, paying a single premium of £100,000. The company operates on an historic cost basis.

    On October 12, 2012, the company surrenders the policy for £300,000. The tax implications are:

  • Although the policy comes into the loan relationship rules on September 1, 2008, there is no annual NTC to bring into charge because the company operates on an historic cost basis.

  • On October 12, 2012, the NTC is calculated as follows:

    amount received on final surrender = £300,000, less amounted invested in 2001 = £100,000, so NTC = £200,000.

  • The amount of the NTC (£200,000) is grossed up in accordance with paragraph 3 using the AR divided by (100 minus AR) multiplied by NTC formula in paragraph 3(3) where AR is the rate of tax on life company profits which is currently 20 per cent.

    In the example above, the NTC would thus increase to £250,000. This means that if the investing company were, say, a 28 per cent taxpayer, the corporation tax would be £70,000 (28 per cent of £250,000) but this would be reduced by the tax credit of £50,000 to £20,000 and this would be the amount of corporation tax payable.

    Finally, however, it is worth observing that given the relatively well known double taxation under the previous chargeable-event provisions when a company invested in a UK bond (with tax due at fund level and on encashment, with no credit for life fund tax), there may be relatively few cases where UK companies had UK bonds in force before April 1, 2008.

  • Recommended

    Value for money in DC pensions

    The Pension Policy Institute (PPI)’s recent report “Value for money in DC pensions” tries to identify factors by which people can assess whether their pension offers fair value for money (VFM). Fiona Tait provides an overview of the findings. Positive Outcomes It is extremely hard to assess VFM in a pension. Press activity naturally focuses […]

    Newsletter

    News and expert analysis straight to your inbox

    Sign up

    Comments

      Leave a comment

      Close

      Why register with Money Marketing ?

      Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

      News & analysis delivered directly to your inbox
      Register today to receive our range of news alerts including daily and weekly briefings

      Money Marketing Events
      Be the first to hear about our industry leading conferences, awards, roundtables and more.

      Research and insight
      Take part in and see the results of Money Marketing's flagship investigations into industry trends.

      Have your say
      Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

      Register now

      Having problems?

      Contact us on +44 (0)20 7292 3712

      Lines are open Monday to Friday 9:00am -5.00pm

      Email: customerservices@moneymarketing.com