LAM02020 - I-E overview: computation overview
This section provides an overview of the main building blocks of the I-E profit computation:
| Step | Method |
|---|---|
| Apportion profits, income and expenses based on commercial allocation | Companies determine a method of apportioning between BLAGAB and non-BLAGAB (where required): LAM05020 |
| Calculate I-E profit or excess management expenses on BLAGAB business following steps in FA12/S73 | Detailed rules prescribed for calculating income and chargeable gains LAM02060 (summary); LAM03000 Income and Gains; LAM04000 Expenses |
| Split I-E profit between shareholders’ share and policyholders’ share | I-E profit split between policyholders’ share and shareholders’ share LAM06020 |
| Apply loss relief and other offsets such as group relief | Restriction on offsets: BLAGAB policyholder profit effectively ring fenced: Rules for offset against shareholder profits. See LAM15000 |
| Calculate shareholder and policyholder tax | Total I-E profit split between policyholder rate and normal CT rate: LAM06000 |
Diagram showing main building blocks of the I-E computation.
The policy holders’ share of BLAGAB I-E profit is substantially, but not completely, ring-fenced from the other profits of the company. The main drivers of I-E profit are generally loan relationships and chargeable gains (dividends being exempt). Life companies have large bond portfolios taxed on a mark to market basis. Fluctuations in market value can result in significant variations in I-E profits or produce excess management expenses. Capital gains (on property, shares and other investments) are also important and again can fluctuate depending on both market movements and realisations.
- The calculation of BLAGAB I-E profit is summarised in LAM02060 and explained further in LAM03000 and LAM04000
- LAM05000 explains how income and gains are allocated to BLAGAB for I-E calculations and allocated between BLAGAB and non-BLAGAB for trade profits calculations
- Other taxable profits broadly comprise almost everything else in the life company that is not included in BLAGAB. These will include:
- non-BLAGAB trade profits taxed as a single trade. See LAM07100 and LAM05000 for apportionment rule
- general insurance trade profits taxed as a separate trade (in a limited number of circumstances): normal rules apply see General Insurance Manual
- non-trade profits: normal corporation tax principles apply: these could include profits derived from LTBFC as described in LAM08000
- Deductions against total profits will be principally loss relief and group relief. A summary of the loss and expense offset rules is included in the tax computation chapter at LAM08000
- The rules for the split of taxable profits between those taxed at the policyholder rates and those taxed as the normal CT rates are set out in LAM06000
The main components of a life insurance company tax computation are illustrated in the diagram in LAM08020 and this includes cross references to the relevant parts of this manual.