LAM01060 - Introduction and long-term insurance business overview: background and purpose

This section outlines the context for the evolution of the life tax regime.

The special tax regime for life insurance has evolved in response to the legal, regulatory and accounting treatment of life companies. It is also linked to the tax basis for individual policyholders which will vary depending on the nature of the product.

An understanding of:

  • the regulatory regime
  • life company accounting
  • the nature of the products and their tax treatment

is important to gaining an understanding of life company taxation.

All of these have been subject to major change in recent years with further developments expected, for example, in accounting in IFRS17.

The current tax regime was introduced from 1 January 2013. Some change was essential. The starting point for the trade profit in the tax computation had been the insurance regulatory ‘PRA’ return. The planned introduction of the new EU Solvency II regulatory regime (effective from 1 January 2016) meant that tax legislation referring to the PRA return would be ineffective. The legislation in FA12 addressed the need for change and facilitated the introduction of a regime more closely aligned with accounting and commercial practice.

The regime arises in part from the longstanding objective of the corporate tax system to tax within the insurance company both:

  • the trade profit of the company
  • the investment return accruing in the company for the benefit of policyholders with certain types of policies

This approach enables:

  • administrative simplicity: collection of tax from a limited number of insurers rather than from a large number of policyholders
  • Exchequer cash flow benefits by collection of tax up front rather than when policies mature

Double taxation is avoided by treating policyholder gains on maturity as having suffered tax at basic rate.

This leads to the need for legislation to specify how the ‘policyholder’ corporation tax on investment return is charged and how the policies to be taxed in this way are to be identified.

The taxation of the policyholder is explained in the Insurance Policyholder Taxation Manual.

A brief summary of the main types of products and the associated regulatory, tax and accounting treatment are set out on the following pages LAM01070, LAM01080, LAM01090 and LAM01100. These are intended as an overview to assist in understanding the structure of the tax regime and are not intended to be comprehensive.