LAM03220 - Calculation of ‘I’ income and chargeable gains: Life companies as chargeable gains group members

Background

Many companies carrying on life insurance business are members of groups of companies. In the same way that specific rules are required to address internal reallocations of assets between different tax categories or boxes within the life company, rules are required to address transactions between the life company and the rest of the group.

Life company specific rules

The normal provisions for transactions between members of groups of companies apply to intragroup transactions involving life insurance companies subject to the exceptions below.

Disapplication of no gain no loss on transfer to group member

FA12/S118(6) dis-applies the no gain no loss rules at TCGA92/S171 and S173 on any transfer of long-term business assets (excluding long-term business fixed capital LAM11030) from or to another group member.

Disapplication of connected party rules

The connected party rules TCGA92/S17 – 18 restrict offset of losses to gains arising on disposals with the same connected person. S18(3) is dis-applied where the life company disposes of assets to the manager of an authorised investment fund TCGA92/S210C(1). This provision recognises that life companies may have a manager of an authorised investment fund within their group as part of their fund management operation. Transfers to and from the authorised investment fund manager would be in the course of normal investment activity and dis-applying TCGA92/S18(3) prevents these transfers being caught by what is an anti-avoidance provision.

Restrictions to reallocation of chargeable gains and allowable losses within a group

TCGA92/S171A allows a company ‘A’ to elect to reallocate a chargeable gain or allowable loss that accrues to it to another group company ‘B’. If A is a life company, a S171A election cannot be made (other than a long-term fixed capital asset LAM11030) as S171 would not apply to an actual transfer i.e. life fund gains cannot be reallocated to another entity.

Chargeable gains and allowable losses can be reallocated from a non-life company into a life company. But they may only be set against BLAGAB allowable losses and BLAGAB chargeable gains insofar as TCGA92/S210A allows LAM03410 – LAM03420.

Specific rules for transfers of business LAM13000

Note that for a ‘qualifying friendly society’ (FA12/S165) the no gain no loss rule in TCGA92/S171 is fully prevented from applying by TCGA92/S171(2)(cd).CG45320

Example

Lifeco A has a (BLAGAB) UK equity unit-linked life fund (X) and transfers shares with a base cost including indexation plus costs of disposal of £300k from fund X to another group (holding) company B at market value of £500k.

The disposal from Lifeco A to company B would normally be at no gain no loss under TGA92/S171 but this is dis-applied by FA12/S118(6).

The BLAGAB chargeable gain in A is based on market value of £500k less £300K (which is A’s indexed CGT base cost plus costs of disposal). There is a chargeable gain of £200K to include in Step 1 of FA12/S75.

B acquires the shares with a base costs equal to market value of £500k. Note that this is a connected party transaction under TCGA92/S18. If the transfer had not been at market value, the consideration would have been adjusted to reflect the market value. Any loss arising from that disposal would be ‘clogged’ i.e. S18 would have applied to restrict the offset of the loss to gains arising from future transfers from A CG14560.

Explaining the example

In the example above, it would not be possible to elect to reallocate the chargeable gain to B under S171A to offset a capital loss in that company as S171 would not apply to an actual transfer.

If instead company B has a chargeable gain or allowable loss it can elect to allocate the gain or loss to company A. However, under S171C(4) an allowable loss would be treated in A as arising on assets in the ‘other than long-term assets’ box and therefore be a non-BLAGAB allowable loss for the purposes of ring fencing TCGA92/S210A. Accordingly if an allowable loss is transferred, any offset in company A against the chargeable gain accruing in the unit-linked life fund would be restricted to the shareholders’ share of that chargeable gain -FA12/S95 and TCGA92/S210A LAM03420.

Note that ‘non-BLAGAB’ allowable losses in this context means ‘allowable losses of the company which are not BLAGAB allowable losses (S210A(13)). This is distinct from (and pre-dates) the term ‘non-BLAGAB’ used elsewhere in this manual to refer to the categories of business excluded from BLAGAB in FA12/S57.

If both A and B are insurance companies and the chargeable gain or allowable loss accrues on the transfer of long-term business assets, then S171C(3) overrides S171C(2) so that FA12/S118(6) again applies and takes the transaction out of S171. This in turn means that the companies cannot make a S171A election to transfer the chargeable gain or allowable loss between them.