GIM4200 - Taxation of general insurance: insolvency

The liquidator of a life insurance company has a statutory duty to continue the company’s trade if he is able to do so. There is no such rule for general insurance, and the normal presumption will apply that any trade that is being carried on immediately before the start of a liquidation will then cease. Insolvency practitioners will often choose not to put insurance companies into liquidation, but to make use instead of Schemes of Arrangement under Part 26 of the Companies Act 2006 (formerly section 425 Companies Act 1985). The administrator of such a scheme can enter into compromise arrangements with creditors more easily, and thus finalise the company’s affairs more quickly, than a liquidator. The replacement of the normal method of settling claims by an unusual method of compromise with creditors as part of such a scheme does not necessarily imply that the company has ceased trading. The factual position should be tested against the criteria in GIM4190.

The administrators under a Scheme of Arrangement acquire full control of the company’s business. Consequently, the appointment of UK resident administrators to a foreign company will normally result in the company becoming resident in the UK for tax purposes under our domestic law by virtue of the fact that its central management and control will be located here. Similarly, residence of the company is likely to be attributed to the UK by a tie-break provision in a double tax treaty that follows the OECD model, and so based on the place of effective management of the company.

Write-downs for annuities products and insurers liabilities

Background

Section 377A of the Financial Services and Markets Act 2000 (FSMA2000) was introduced by the Financial Services and Markets Act 2023. It retains, extends and clarifies the write-down of insurer liabilities, defines the court’s powers and puts a comprehensive framework in place for the management of write-downs. It includes new provisions to improve insurer insolvency arrangements, manage financial distress in a more orderly manner and ensure continuity of cover for policyholders.

Corporation Tax consequences

Write-downs

Insurers who are in financial distress may have their liabilities written down by a court order under s377A FSMA2000. The legislation at 130A and 323B(2) of CTA09 have the effect that the trading receipts and loan relationship credits, that would otherwise have arisen as a result of the write-down, are not brought into account for tax purposes.

Subsequent variations and terminations of the write-down order

FSMA2000 also permits a court to partially or fully reverse a write-down order if an insurer’s financial position improves and it is deemed able to pay a greater proportion of its debts. Where the write-down order is subsequently varied or terminated, the corresponding trading deduction is denied by s130A CTA09. Additionally, to the extent that loan relationship credits were not brought into account upon the write-down by s323B(2), the corresponding loan relationship debits are not to be recognised (s323B(3) CTA09) if the liability is restored.

Pensions tax consequences

There are separate provisions in Part 4 of Finance Act 2004 which deal with the pensions tax consequences of a court ordered write-down under s377A FSMA2000. The guidance can be found in PTM062400, PTM072200 and PTM133300.