The Insurance Companies (Taxation of Re-insurance Business) Regulations 2018
Published 27 February 2018
© Crown copyright 2018
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Who is likely to be affected
Life insurance companies and reinsurers who are party to reinsurance arrangements involving reinsurance of basic life assurance and general annuity business (BLAGAB).
General description of the measure
The rules for taxing BLAGAB of a life insurance company seek to tax both the company’s profits from writing life insurance business and the policyholder’s investment return. The rules include provisions to prevent the life insurance company reinsuring its BLAGAB with a reinsurance company (not generally within BLAGAB) and avoiding the tax on the policyholder’s investment return.
Where a life insurance company (‘the cedant’) enters into arrangements to reinsure BLAGAB the rules provide for imputation of an investment return to the cedant in circumstances provided for in regulations.
This measure brings in regulations to define:
- when a reinsurer’s business will be taxed as BLAGAB
- when imputation applies to the cedant
- how the investment return is to be calculated where imputation applies
These new regulations replace the previous regulations, Insurance Companies (Taxation of Reinsurance Business) Regulations 1995 (SI1995/1370), with rules that reflect modern commercial practice. The new regulations will enable commercial reinsurance of BLAGAB to take place while ensuring that UK tax on the policyholder’s investment return is still paid on an appropriate basis.
Policy objective
The measure enables insurance companies to reinsure risks relating to BLAGAB in appropriate circumstances, removing a tax obstacle to commercial transactions that may facilitate economic and capital efficiency.
Background to the measure
The current reinsurance regulations require replacement to reflect changes in regulatory requirements and commercial practice.
Detailed proposal
Operative date
The regulations will be operative from [21 days following the date they are laid].
Current law
The current regulations are Insurance Companies (Taxation of Reinsurance Business) Regulations 1995 (SI1995/1370).
Proposed revisions
The new regulations recognise that in the majority of reinsurance arrangements the assets backing the policyholder liabilities remain with the cedant. This means that the cedant will include the actual investment return on those assets within its BLAGAB profit. The new regulations remove the need to impute an investment return in these circumstances.
The reinsurer, if chargeable to tax in the UK, would also not have to impute an investment return if the cedant is being charged on the investment return.
The new regulations also provide a revised formula to compute the investment return to be imputed for other BLAGAB reinsurance arrangements. Additionally where policies cease, or the reinsurance arrangement ends, the imputed amount for the final accounting period may be a reconciling figure to reflect the actual investment return over the life of the policy. This will be the case where the cedant is able to produce evidence of the amount of investment return that would have been chargeable had the reinsurance arrangement not occurred.
Summary of the impacts
Exchequer impact (£m)
| 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 | 2021 to 2022 | 2022 to 2023 |
|---|---|---|---|---|---|
| Nil | Nil | Nil | Nil | Nil | Nil |
The measure is not expected to have an Exchequer impact.
Economic impact
The measure is not expected to have any significant economic impacts. However some economic benefit should be achieved as reinsurance allows Life insurance companies to enjoy improved capital efficiency and competitiveness.
Impact on individuals, households and families
The measure is not expected to have a direct impact on individuals and households because this is a change that affects Life Insurance companies only.
The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
It is not anticipated that this measure will impact upon people with protected characteristics.
Impact on business including civil society organisations
This measure will impact on approximately 70 to 90 insurers and re-insurers who have BLAGAB and choose to reinsure this business. These businesses will benefit from using the formula provided by the new regulations which is simpler than that provided by the regulations being replaced. The impact on businesses admin burdens is expected to be negligible. One off costs include familiarisation with the new regulations. It is not expected that there will be any on-going costs because this change updates the existing regulations to reflect modern commercial practice. There is no impact on civil society organisations.
Operational impact (£m) (HMRC or other)
It is not anticipated that implementing this change will incur any additional cost or savings for HMRC.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
HMRC will monitor this measure through ongoing contact with the insurance industry.
Further advice
If you have any questions about this change, please contact Marie Madden on Telephone: 03000 529481 or email: marie.madden@hmrc.gsi.gov.uk
Declaration
John Glen MP, Economic Secretary to the Treasury, has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.