LAM10305 - Excluded Business: Reinsurance of BLAGAB treated as BLAGAB in reinsurer: FA12/S130A

Where BLAGAB is acquired by an insurer it is common for the Part VII transfer to be preceded by a full reinsurance of the business to be transferred to give economic effect to the transaction immediately. Unless the reinsurance is ‘excluded business’ for the purposes of FA12/S57(2)(e), prior to the introduction of FA12/S130A it was treated as non-BLAGAB in the hands of the reinsurer.

Although the reinsured business was non-BLAGAB in the reinsurer, an inconsistency in tax treatment arose because, that same business is BLAGAB in the cedant and will also be BLAGAB in the transferee once the business has been transferred by way of the Part VII transfer. Reinsured business which is BLAGAB in the hands of the cedant, could potentially, depending on the accounting treatment, give rise to a non-BLAGAB loss in the reinsurer equivalent to the price paid for the business. Any non-BLAGAB loss could be fully relieved against total profits or surrendered as group relief.

For the purposes of this guidance reinsured business, which is reclassified by FA12/S130A, is referred to as “reinsured BLAGAB”.

FA12/S130A

FA12/S130A addresses this tax potential mismatch in the reinsurer, where reinsurance of BLAGAB precedes a Part VII transfer. The tax treatment of the cedant is unaffected by FA12/S130A.

FA12/S130A applies where BLAGAB is reinsured and it is reasonable to suppose that the reinsurance is in connection with an insurance business transfer scheme. The provisions also apply where the intention to transfer the business occurs at a later stage than the original reinsurance, or where the transfer is to a party connected to the reinsurer.

The tax mismatch is addressed by classifying reinsured BLAGAB as ‘excluded business’ for the purposes of FA12/S57(2)(e). The result being that the reinsured BLAGAB is treated as BLAGAB (rather than non-BLAGAB) in the hands of the reinsurer. Specifically, the tax adjusted trade profit or loss which is referable to the reinsured business is attributed to BLAGAB in the reinsurer.

Where the business being reinsured consists of both BLAGAB and non-BLAGAB, FA12/S130A applies only to the reinsured BLAGAB. The tax treatment of reinsured non-BLAGAB is unaffected by FA12/S130A. Additionally, where a tax adjusted profit or loss is created upon IFRS 17 transition, it is allocated to BLAGAB to the extent that the transitional amount arises from the BLAGAB business which was subject to the reinsurance arrangements.

Reinsurers of BLAGAB will therefore have a BLAGAB trading profit or loss, even if they do not conduct a wider BLAGAB trade. However, as the cedant will continue to be within I-E in respect of the reinsured business, the I-E profit of the reinsurer referable to the reinsured business is excluded from its calculation of the I-E profit.

There is an exception where the reinsurer relieves a BLAGAB trade loss which gives rise to the clawback of management expenses, under step 4 of FA12/S76 (see LAM04300). Where a BLAGAB trade loss is relieved by the reinsurer, BLAGAB management expenses are reduced by an equivalent amount, thereby increasing I-E profits of the reinsurer. In that circumstance the I-E charge will continue to apply in relation to the reinsured business, but only in respect of expenses reversed in FA12/S78(5) amounts.

Minimum Profits Test and Policyholders’ Share

Where the insurer already has existing BLAGAB in addition to the reinsurance, the BLAGAB trade profit is calculated in accordance with LAM07000. The insurer will have one trade profit calculation which will include all the profits or losses arising from the reinsured business. That trade profit will then be used for the purposes of applying both the minimum profits test in FA12/S93 and the policyholders’ share of I-E profits in FA12/S102.

When performing the minimum profits test the part of the I-E profit in FA12/93(2)(a) attributable to the reinsured business will be nil. If the minimum profits test is triggered so that an I-E receipt arises under FA12/S93(5) then it will be necessary to apportion this receipt. In accordance with FA12/S130A(5) the part of the I-E receipt which is referable to the reinsured business will not be an I-E receipt of the insurer under FA12/S93(5)(a). The balance will be taken into account as an I-E receipt of the insurer.

Where, on the other hand, the only BLAGAB carried on by the insurer is the reinsured business, the BLAGAB trade profit or loss will again be calculated following LAM07000 and the profit or loss will be wholly attributable to that business. It follows that, in those circumstances, the minimum profits test cannot give rise to an additional I-E amount.

Commencement

FA12/S130A applies on or after 15 December 2022, regardless of when the reinsurance arrangements were entered into. This means that it applies to reinsurance arrangements already in place on 15 December 2022, as well as future arrangements entered on or after 15 December 2022. Additionally, the clause applies to the whole of any accounting period beginning before 15 December 2022 for which the reporting standard IFRS 17 is adopted, but only if the decision to adopt IFRS 17 for that accounting period is taken on or after 15 December 2022.