LAM03200 - Calculation of ‘I’ Income and chargeable gains: Step 2 FA12/S73: Calculating BLAGAB chargeable gains - an overview: FA12/S75

The tax treatment of chargeable gains and allowable losses referable to BLAGAB within the life company is based on the chargeable gains rules applicable to companies generally, with modifications. It is intended to provide a proxy for the tax that the policyholder might have paid on chargeable assets if they were held directly. It is a rough proxy. The life company can claim indexation allowance in computing chargeable gains but only indexed up to 31 December 2017. The charge on the company takes no account of the fact that policyholders have an annual capital gains tax free allowance.

This guidance only covers the modifications of the normal corporation tax rules applicable to chargeable gains that apply to life companies and not the general rules. The general chargeable gains rules can be found in the Capital Gains Manual. Gains and losses on assets referable to non-BLAGAB are not within the chargeable gains rules but are brought into the calculation of trade profits. LAM07100

The table at LAM03040 sets out the main types of chargeable assets that may be held by a life company and indicates where these fall within the chargeable gains provisions.

The requirement to include BLAGAB chargeable gains and allowable losses in the calculation of “I” is set out in step 2 of FA12/S73:

‘calculate the BLAGAB chargeable gains of the company for the accounting period as adjusted for allowable losses’

The method of calculating BLAGAB chargeable gains is set out in steps in FA12/S75.

In summary, the legislation requires calculation of BLAGAB chargeable gains and allowable losses on disposals of assets held for the purposes of the company’s long-term business (taking no account of any assets forming part of long-term fixed capital LAM11000) in accordance with the rules in TCGA92 (FA12/S75(4)). The gains and losses involved are only those that are referable to BLAGAB. The determination of what is referable is covered in more detail in the apportionment rules explained in LAM05000.

Having identified the chargeable assets, the two steps in S75 are:

Step 1: Calculate chargeable gains referable to BLAGAB.

Step 2: Deduct:

  • allowable capital losses referable to BLAGAB in the accounting period, and
  • allowable capital losses unrelieved from previous periods so as to reduce the answer to nil, but no further

The basic rules relating to chargeable assets and calculating chargeable gains and allowable losses are those contained in TCGA92 and explained further in the Capital Gains Manual. The calculations generally follow these basic rules. There are however certain areas where the BLAGAB rules diverge from the basic rules, or where additional rules are overlaid on the standard rules. The principal differences are set out below.

  • Chargeable Gains ‘boxes’, transfers and intragroup rules LAM03210 - LAM03220.
  • Related to the chargeable gains boxes are the share pooling rules which specify separate pools for calculating gains within the company LAM03230.
  • Deemed mark to market annual gains disposals for certain collective investment or similar vehicles (including unit trusts, OEICs, offshore funds) with any resulting net chargeable gains accruing spread over 7 years; specific rules for losses – see LAM03300 - LAM03350.
  • Substantial shareholdings exemption: the definition of a ‘substantial shareholding’ is amended in TCGA92/SCH7AC/PARA17(1) to substitute ‘30%’ for long-term business assets (excluding long-term business fixed capital LAM11060) instead of the 10% holding required for other assets. Rules apply for aggregation within the group, to deal with the interaction between the SSE and box transfers, derivatives, convertibles and options LAM03720 - LAM03740.
  • Anti-avoidance provisions: bed and breakfasting rules as modified by TCGA92/S210B to restrict losses on certain disposals where there is reacquisition shortly thereafter. These rules specify the order of set off and allow for certain exceptions LAM03710.
  • Losses: BLAGAB chargeable gains and allowable losses are largely ring fenced from other chargeable gains and allowable losses of the company. However, there may be a share of the BLAGAB chargeable gains that are treated as ‘shareholder’ chargeable gains TCGA92/S210A. Any such gains can be offset by any other allowable losses of the company, e.g. arising on long-term business fixed capital LAM11060, up to the amount that reduces the I-E to nil FA12/S95(1) LAM03410. In addition the permitted amount (i.e. the measure of shareholders’ share) of BLAGAB allowable losses can be used to offset any other chargeable gains of the company LAM03410 - LAM03420.

Where there are assets which are referable to both BLAGAB and non-BLAGAB, the total chargeable gain or allowable loss is calculated on the asset but only the part referable to BLAGAB is apportioned to BLAGAB in the tax computation. The rules for apportioning between BLAGAB and non-BLAGAB are explained in LAM05050 – LAM05100.