CG69100 - Businesses: insurance: insurance agents
General
Agents who are employees of certain insurance companies and friendly societies may have a financial interest in their agencies. Such an interest is known as a 'book' or 'book interest'. To take over existing business, a new agent pays a capital sum to an existing agent for his 'book', either directly or through the company concerned. In addition, there may be frequent capital payments between agents on transfers of business, for example when policy holders move from one area to another.
The content of an agent's 'book' is continually changing because of policies maturing, new policies being taken out and transfers between agents. The 'book' is nevertheless a single chargeable asset in the nature of goodwill. Reliefs are available for replacement of business assets, see CG60250C. The gain on disposal may qualify for Business Asset Disposal Relief, see CG63950P.
This does not apply to all agents of insurance companies which operate a 'book' system: some are engaged on pure commission terms and have no personal 'book interest'.
Procedure agreed with representatives of insurance agents
In the 1960s a procedure for dealing with changes in 'books' was agreed with the representatives of insurance agents. It simplified and reduced the number of computations of chargeable gains arising on disposals or part-disposals of 'books'.
The procedure was agreed in the early days of Capital Gains Tax. Subsequently, indexation allowance was introduced and then rebasing. The following instructions suggest how you can adapt the simplified scheme to take account of these later provisions.
The agent's 'book' is a single asset. Acquisitions increase the cost of the 'book' and 'small' disposals are deducted from cost. A capital gains computation is necessary only if a 'large' disposal takes place.
Computations under agreed procedure
You start with the allowable expenditure on the 'book' at the start of the year, or at the date of acquisition.
Add together the capital sums received or receivable for the year and deduct all capital sums paid in the year.
If capital payments exceed receipts (in other words, additions to goodwill exceed disposals), add the net capital payment to the balance of allowable expenditure.
If the capital receipts exceed capital payments, compare the net capital receipts with the balance of allowable expenditure at the start of the year, or at the date of acquisition if later:
- If the net capital receipts are 5 per cent or less of the balance of allowable expenditure (a 'small' disposal), you may simply deduct them from the balance of allowable expenditure. However, if the agent so requests, the part-disposal rules should be applied.
- If the net capital receipts are more than 5 per cent of the balance of allowable expenditure (a 'large' disposal), you should apply the part-disposal rules, see CG12730P, as if there were a single disposal of that amount in the year.
Date of disposal
Except where an agent provides computations based on the year to 5 April, the employer's accounting year should be treated as the year for computation purposes. Additions or disposals should be treated as taking place on the last day of that year.
On the cessation of an agency (for example, on the sale of the whole of the agent's 'book' or on his death), all disposals since the previous accounting date should be treated as being made at the date of cessation.
Example
This example illustrates how the agreed procedure worked before the introduction of indexation allowance and rebasing. Accumulated allowable expenditure at end of year 1 is £1,500.
| Year | Payments | Receipts | Difference |
|---|---|---|---|
| In year 2 | 335 | 175 | 160 |
| In year 3 | 80 | 140 | -60 |
| In year 4 | 100 | 400 | -300 |
Allowable expenditure brought forward from year 1 £1,500
Year 2 Payments exceed receipts Add net payments to balance of expenditure £160
Total £1,660
Year 3 Net receipts £60 are less than 5% of £1,660 'small disposal: £60
deduct from balance
Total £1,600
Year 4 Net receipts £300 exceed 5% of £1,600 'large' disposal:
part-disposal computation needed Value of 'book' at end of year 4
is agreed at £2,100 ( this reflects new business obtained by agent)
Net disposal consideration £300
Less £1,600 x £300 £200 £200
£300 + £2,100
Chargeable gain £100
Allowable expenditure carried forward £1,400
Indexation allowance and rebasing
The simplified scheme should be adapted to take account of indexation and rebasing. There is not an approved method which has been agreed with the representatives of the insurance agents. You should be prepared to consider any method which is reasonable and is applied consistently.
If a taxpayer is within the charge to Capital Gains Tax, neither indexation allowance nor taper relief apply to disposals of assets on or after 6 April 2008. Previously indexation allowance had been frozen at April 1998. Companies and other concerns within the charge to Corporation Tax are not affected by these changes. For indexation allowance see CG17200C and for taper relief see CG17895.
'Book' held on 31 March 1982: rebasing election
If an election under section 35(5) of the Taxation of Chargeable Gains Act (TCGA) 1992 is in force, you will need only a computation based on the market value at 31 March 1982 for disposals on or after 6 April 1988. If there have been acquisitions or disposals between 31 March 1982 and 5 April 1988, you will need to adjust the allowable expenditure based on the 1982 valuation to take account of those movements. This adjustment is for the purposes of disposals on or after 6 April 1988 only: it does not affect the computations for years up to 1987 to 1988.
'Book' held 31 March 1982: no rebasing election
If there is no election under section 35(5) TCGA 1992 in force, it will be necessary to compare the gain or loss computed by reference to the valuation at 31 March 1982 with the gain or loss computed by reference to original cost. And indexation allowance should automatically be computed by reference to whichever of cost or 1982 valuation is most favourable to the taxpayer.
If a taxpayer is within the charge to Capital Gains Tax, neither indexation allowance nor taper relief apply to disposals of assets on or after 6 April 2008. Previously indexation allowance had been frozen at April 1998. Companies and other concerns within the charge to Corporation Tax are not affected by these changes. For indexation allowance see CG17200C and for taper relief see CG17895.
If the computation shows a gain by reference to the valuation at 31 March 1982, the kink test cannot have the effect of increasing the gain. But you may need to apply the kink test to restrict a loss. You may accept any reasonable method of applying the kink test if a loss restriction is shown in the computation. Alternatively, you can ask Capital Gains Technical Group for advice.
Valuations
If 'books' need to be valued for any reason, for example rebasing or on a part disposal, the basis of valuation should follow the basis adopted by the agent's employer. The basis of valuation may vary as between different employers and different areas of the same employer. It also reflects the rates of agent's commission payable on various types of policy.
A common method of valuation was to take between 25 and 30 times the weekly amounts collectible by the agent at the various rates of commission appropriate to different types of business (including the weekly equivalents of monthly, quarterly or annual premiums), after adjusting those amounts to a standard rate of commission of 25 per cent. As an example, a 'book' comprising weekly amounts collectible totalling £1,000 might be divided, converted to a standard rate of commission of, say, 25 per cent, and valued as follows:
Percentage rate of commission | Weekly amounts collectible | - | Equivalent at 25 per cent |
|---|---|---|---|
| 25 | £500 | £500 | |
| 10 | 400 x | £10 | £160 |
| - | - | £25 | |
| 15 | 100 x | £15 | £60 |
| - | - | £25 | |
| - | - | £1000 | £720 |
Valuation at 25 times: £720 x 25 = 18,000
Valuation at 30 times: £720 x 30 = 21,600
An alternative method used for the 'books' of Co-operative Insurance Society agents was to multiply the weekly amount collectible by the rate of commission. Thus, in the example above, the valuation would be £18,000, computed as follows:
| £ | £ | £ |
|---|---|---|
| 500 x | 25 = | 12,500 |
| 400 x | 10 = | 4,000 |
| 100 x | 15 = | 1,500 |
| - | - | 18,000 |
The examples should be taken as illustrating the general basis of valuation. However, a valuation produced by either method is subject to adjustment to reflect the age distribution of policy holders and so valuations put forward by agents may be accepted if they appear to be computed on the above lines.