Where the historic cost basis is adopted, an investment life insurance contract will be taxed as follows:
In other words, if an historic cost basis of accounting is adopted:
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:
amount received on final surrender = £300,000, less amounted invested in 2001 = £100,000, so NTC = £200,000.
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.
