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HMRC internal manual

General Insurance Manual

Taxation of the investment return: the general rule: investment income treated as trading receipt

Income derived by an insurance company from its current assets (GIM5010) is regarded as a trading receipt, because it is an essential part of an insurer’s trading operations to employ these assets to produce investment income.

This principle was established in a number of early cases, such as Liverpool & London & Globe Insurance Co v Bennett 6TC327. As Lord Mersey pointed out, one of the most important parts of the profits of the business is derived from the temporary investment of the premiums.

“It is well known that in the course of carrying on an insurance business large sums of money derived from premiums and from other sources accumulate in the hands of the insurers, and that one of the most important parts of the profits of the business is derived from the temporary investment of these moneys. These temporary investments are also required for the formation of the reserve fund, a fund created to attract customers and to serve as a standby in the event of sudden claims being made upon the insurers in respect of losses. It is … impossible to say that such investments do not form part of this company’s insurance business, or that the returns flowing from them do not form part of its profits.”

More recently the Court of Appeal and the House of Lords returned to the issue in NuclearElectric plc v Bradley 68TC670. The question in this case was whether investment income could be properly regarded as a trading receipt of the trade of the generation and supply of electricity produced by nuclear reactors. The income was earned on a pool of assets that might eventually be used to meet the substantial costs of reprocessing fuel, disposing of radioactive waste and decommissioning nuclear power stations. The company failed in its argument that its investment income was a trading receipt and in his judgement in the Court of Appeal, Millett LJ distinguished its position from that of an insurance company, saying that:

“The income from investments held by a trader is prima facie investment income; but it may in certain circumstances be brought into account as a trading receipt. Whether it may or may not be so treated depends on the nature of the trade. What the authorities show is that the nature of the trade must be such that it can be fairly said that the making and holding of investments at interest is an integral part of the trade… An insurance company, for example, charges premiums in return for the acceptance of a financial risk. It supplies a contingent monetary obligation enforceable against itself. It meets that obligation not from the premiums alone, but from the premiums and the income derived from the investment of the premiums in the period which must necessarily elapse between the receipt of the premiums and the payment of claims. It ‘embarks its funds in its business simply by having money ready to pay its debts with’; ‘the investment of its funds is as much a part of its business as the collection of the premiums’; and the making and holding of the investments ‘is a necessity of insurance business.”

Similarly, in the House of Lords, Lord Jauncey said:

“At one end of the scale are insurance companies and banks, part of whose business is the making and holding of investments to meet current liabilities.”