GIM11050 - Captive insurers: taxation issues: general
Whatever the balance of commercial and regulatory advantages, generally there is also a significant tax benefit.
Most businesses will find it prudent to reserve against contingencies, but the creation of reserves, where that is possible under relevant accounting standards, may not be recognised for tax purposes as allowing a deduction in computing profits. Instead an insurance premium paid to a captive may allow a tax deduction, and the corresponding receipt, kept in the group, may escape UK rates of tax if the captive is offshore in a low tax territory. Even if the captive were to be located on-shore there could still be a tax advantage. This is because an insurance company will normally obtain a deduction for its technical provisions (see GIM6000+), whereas the insured may not obtain a deduction for the contingent liabilities represented by those claims if it chose to carry the risks itself.
The investment income and gains arising on the premiums paid together with that on any funds used to capitalise the captive are also accrued offshore and may be taxed at relatively low rates. The company may, after a few years, take on the characteristics of a moneybox company.
The main issue in dealing with a captive is how far the commercial arrangements make sense. Suitable enquires to assess the tax risk would include basic information such as the nature of the insured risks, the premiums payable, the cover obtained, and reinsurance details. It will also be appropriate to review the company’s other insurance arrangements more generally.
The following issues may be relevant to the review of a captive insurer
- residence
- trading in the UK
- premium deductibility
- transfer pricing
- premiums as capital payments
- controlled foreign companies legislation (GIM11070).