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HMRC internal manual

General Insurance Manual

Taxation of the investment return: investment gains: accounting periods beginning before 1 January 2002: gains and losses on equities and other non-debt assets

As GIM5020 shows, profits made by an insurer in turning over its investments held on current account are an integral part of its trading receipts.

Where it is an essential feature of the business of a financial concern to vary its investments and turn them to account, the profits or losses on such investments are to be taken into account in computing the trade profits.

No deduction is allowed, though, for any fall in market value below cost at accounting dates before any profit arises (nor would any increase in value be recognised) unless fair value accounting is used (see GIM5180).

The question whether a sale of an asset gives rise to a trading receipt has been considered by the courts over many decades. In some cases the issues of timing (when the receipt arises) and character (whether trading receipt) are mingled, which can make identification of the principles difficult.

The first case to consider the issue of a profit on sale of investments held by an insurer was in 1889, Northern Assurance Co v Russell 2TC at page 578, although without analysis. Reasoning first appears in California Copper Syndicate (Limited and Reduced) v Harris 5TC159, where the Lord Justice Clerk said (at page 166):

‘Enhanced values obtained from realisation or conversion of securities may be assessable where what is done is not merely a realisation or change of investment but an act done in what is truly the carrying on or carrying out of a business.’

Later cases confirming this principle include L & L & G, Frasers (Glasgow) Bank Limited v CIR 40TC698, and General Reinsurance Co Ltd v Tomlinson 48TC81.

The latter case is significant because Foster J. in the High Court thought that the Commissioners were fully justified in concluding that profits earned on a portfolio of investments were part of the profits of the company’s London branch. He added that he thought this “was in fact the only true and reasonable conclusion” - despite the fact that claims were normally met from money held in the bank, and the main reason for realising investments was simply to improve the portfolio.

In coming to this conclusion he cited with approval the Privy Council case of Punjab Co-operative Bank, Amritsar v Commissioner of Income Tax, Lahore [1940] AC 1055 and the Australian case of Colonial Mutual Life Assurance Society Ltd v Federal Commissioner of Taxation [1946] 73 CLR 604.

There has been a number of cases in the Australian courts on this subject, and details of them are available on general query to CT&VAT (Technical) Insurance Group - see ‘Technical Help’ link on left bar.