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HMRC internal manual

Company Taxation Manual

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HM Revenue & Customs
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Particular bodies: friendly societies: business categories

Position before 1 January 2013

The taxation of long term business was changed by FA12.  Refer any issues relating to pre-change periods to CTIS (Insurance).

Position on or after 1 January 2013

A distinction is made for tax purposes between the ‘long term business’ and the ‘other business’ carried on by a registered or incorporated friendly society.

A further distinction within ‘long term business’ is between ‘basic life and general annuity business’ (BLAGAB) and ‘other long term business’ (non-BLAGAB).  Non-BLAGAB comprises permanent health insurance (PHI), pension, individual savings account (ISA) and child trust fund (CTF) business, which need to be kept separate.  This is because the exemption available to BLAGAB (CTM40325) does not extend to these other business types.

Long term business

This is defined at FA12/S56, S63 and S64. The definition refers to contracts of insurance which fall within Part II of Schedule 1 to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI2001/544), “the RAO” which divides insurance business into nine paragraphs.  Long term business is covered by paragraphs I to IV.

Paragraphs I to III cover the provision by a society for its members of

  1. any form of life insurance policy, including a policy which is part of an individual savings account (ISA) or a child trust fund (CTF)
  2. any annuity contract, including retirement annuity contracts and personal pension scheme contracts,
  3. insurances paying a benefit on marriage or on the birth of a child.

The business of writing contracts in paragraphs I to III can constitute PHI, pension, ISA or CTF business.  But any business in these categories does not qualify for the exemption in FA12/S153.

Pension business

This is defined at FA12/S58. The definition covers contracts entered into for the purposes of a registered pension scheme under the legislation which applies from 6 April 2006.  Before that day ‘pension business’ included all types of insurance or annuity contracts which may arise in connection with any scheme ‘approved’ by HMRC.

In practice, the pension business of a friendly society is usually limited to

  • approved retirement annuity contracts issued to members in the past, and
  • providing approved personal pension schemes.

ISA business

This is defined at FA12/S60 by reference to ITTOIA05/S695 (1).

A friendly society may write ISA business.  Until 2005 it was limited, like insurance companies, to policies with premiums not exceeding £1000 per year per ISA.  This is additional to the exempt life or endowment business exemption of £270 per year.

The separate insurance component of an ISA was abolished from 6 April 2005.  From that date, an insurance policy falls either in the stocks and shares component or the cash component of the  ISA depending on the nature of the policy.  If the policy is ‘cash-like’, that is, broadly, the investor is not exposed to any significant risk of loss in the first five years exceeding 5 per cent of the value of the investment, then the policy will be held in the cash component.  Otherwise it falls in the stocks and shares component.

ISAs are simplified from 1 July 2014, with equal limits for cash and investments.  For tax year 2014-15, the limit is £15,000 in cash, investments or a mixture of both.  Subscriptions to an ISA between 6 April 2014 and 30 June 2014 count towards the £15,000 limit.

CTF business

CTF business is defined at FA12/S59 by reference to the Child Trust Fund Act 2004.

A friendly society may write CTF business and many have been prominent in offering CTF policies.  A CTF policy may be offered in addition to an exempt BLAGAB policy.

Sickness or injury

Paragraph IV covers a wide range of insurance against sickness or injury.  Although such insurance falls within the general definition of ‘long term business’, the majority of these contracts are excluded.  Where the contracts were made before 1 September 1996 policies:

  • which secure benefits both in the event of sickness or infirmity and in the event of death, and
  • under which not less than 60 per cent of the premium is attributable to the sickness or injury benefit

remain within the definition of ‘long termbusiness’.  Such policies are rare, and in general, all sickness or injury insurance can be expected to fall outside the category of ‘long term business’.

For contracts made on or after 1 September 1996, business within paragraph IV will be within the definition of ‘long term business’ if the contract also includes business within paragraphs I, II, or III of  part II of the RAO.  This means that a contract which only provides for sickness benefits and does not provide for any payment on death is not part of long term business, but a contract that provides for payment on death or the onset of a serious illness is part of long term business.

Other business

The term ‘other business’ covers all of the business and activities of a society that fall outside the definition of ‘long termbusiness’.  ‘Other business’ is limited by the Friendly Societies Acts to those activities permitted to a registered or incorporated society.  Permitted activities cover a wide range, including contractual arrangements with members for insurance to cover

  • sickness,
  • medical expenses, or
  • unemployment.

Societies may also hold discretionary funds that their committee of management may apply to a wide range of benevolent and social purposes.

‘Holloway’ business is a particular type of sickness assurance.  By paying a higher premium than is required to fund benefits, a member can build up a balance on an account held for personal benefit.  This falls within ‘other business’.  See IPTM6010 for further information on sickness assurance.