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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Deemed loan relationships: investment life insurance contacts: scope and commencement: accounting treatment

Accounting treatment of investment life insurance contracts

The tax treatment under the loan relationships rules of an investment life insurance contract owned by a company will follow the treatment of that contract in the company’s accounts. There a number of accountancy standards that a company might use in accounting for an insurance contract including:

Historic cost basis

Under UK Generally Accepted Accountancy Practice (GAAP) where the company does not apply Financial Reporting Standard (FRS) 26, the contract may be accounted for as a fixed asset investment or a current asset investment under the historic cost convention and normally any profits or losses on the contract will only be recognised on disposals of rights under the contract.

Fair value

Where a company accounts for a contract under FRS26 or International Accounting Standard (IAS) 39, it may use fair value basis. Movements in the fair value will be recognised each year through the profit and loss account.

Current cost

Where a company adopts the alternative accounting rules as allowed under the Companies Act 1985 if the policy is a current asset it could account for a contract using ‘current cost’. This is effectively the same as market value and movements in the current cost will be recognised in the revaluation reserve each year until realised.

Valuation

Where a company adopts the alternative accounting rules as allowed under the Companies Act 1985, if the policy is a fixed asset it could account for the contract using either market value, or directors’ valuation. Movements in the valuation will be recognised in the revaluation reserve each year until realised.

Amortised cost

Under FRS26 or IAS39 a company may account for an insurance contract under amortised cost basis with any amortisation gains or losses recognised each year in the profit and loss account.