LAM10230 - Reinsurance: Calculation of imputed investment return FA12/S90 (reinsurance arrangements entered into on or after 1 June 2018)
The calculation of investment return accruing to the cedant under FA12/S90 is specified in The Insurance Companies (Taxation of Re-insurance Business) Regulations 2018/538 Schedule ‘Investment Returns’. The regulations distinguish between the ongoing annual calculations for continuing polices and calculations where policies cease in the cedant’s accounting period (APC). FA12/S91(4) requires calculations on a policy-by-policy basis and the regulations follow this approach.
Continuing policies
For continuing policies the amount of income treated as accruing to the cedant is calculated by the imputed return formula in paragraph 8 of the schedule (SI2018/538/Para 2). A factor, equivalent to the average rate of return on UK 5 year gilts for the APC plus 4%, is applied to the average amount of liabilities which relate to the reinsurance in the accounting period (SI2018/538/SCH/PARA8).
Ceasing policies and end of reinsurance arrangement
Where an individual policy which is the subject of the reinsurance ends within an accounting period, or the reinsurance arrangement itself ends, there is a true up to the actual amount of the investment income arising to that policy across the period of the reinsurance. This applies to ceasing polices in each APC and in APC when reinsurance arrangement ends.
| True up calculation | ||
|---|---|---|
| Step 1 | Imputed investment return accrued to date of cessation on the policy | X |
| Step 2 | Calculate the investment income which would have been chargeable to tax if the reinsurance had not been entered into | Y |
| Step 3 | If X greater than Y treat difference as a loss under S91(6). If X less than Y treat difference as additional ‘I’ |
If there is an excess charge it is treated as income referable to BLAGAB and is brought into account in the I-E calculation as income in Step 1 of FA12/S73. If it is a deficit then it is carried forward as a loss under FA12/S91(6) offset against amounts in future periods chargeable under S90.
This approach fulfils the requirement in FA12/S91(4) for a policy-by-policy reconciliation but enables a view of the whole arrangement to be taken at the end of a reinsurance arrangement.
However it is possible that insurers may not always be able (or willing given the practical difficulties) to calculate the actual investment return that would have been subject to I-E, in respect of individual ceasing policies on an annual basis (Step 2 of the true up calculation). In those circumstances the imputed return will continue to be applied across the whole period of the reinsurance.
In the accounting period of the cedant ‘APC’ in which the reinsurance arrangements comes to an end, where the cedant can provide evidence of what the actual investment return taxed under I-E would have been, the cumulative imputed return can be adjusted in that final APC. That applies to both the per policy calculation and the true up necessitated by the end of the reinsurance. As reinsurance arrangements are generally bespoke it is difficult to specify what evidence might meet the test of being evidence which satisfies an officer of HMRC. In practice, reasonable explanations with supporting accounting or actuarial evidence should be accepted.