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HMRC internal manual

General Insurance Manual

Taxation of the investment return: investment gains: accounting periods beginning before 1 January 2002: portfolio assets and trading stock

A general insurer’s portfolio assets are not trading stock in the ordinary sense. This is why the assets cannot be written down below cost at the accounting date unless fair value accounting is used. Portfolio assets is used here in the sense of assets held for as ordinary investments of the insurance business, in contrast to longer term ‘structural’ assets.

On the other hand, the case of Alherma Investments Limited v Tomlinson 48TC81 (heard together with the General Reinsurance case) established that where the legislation uses a wide definition of ‘trading stock’ along the lines of that to be found in what is now ICTA88/S100 (2) (‘property such as is sold in the ordinary course of the trade’) those portfolio assets will fall within it. Consequently they are to be regarded as trading stock on cessation of a trade for the purposes of ICTA88/S100.

If investments are transferred from an insurance company to another member of a group of companies, or vice-versa, and the investments are not ‘trading stock’ within the ICTA88/S100 meaning in the hands of the other company, TCGA92/S173 will apply.

On a transfer to the insurer of an investment treated as ‘trading stock’ within that meaning in its hands, the insurer is to be treated, for the purposes of TCGA92/S161, as having acquired the asset otherwise than as trading stock, and as having immediately appropriated it to trading stock.

There is therefore a market value disposal for chargeable gains purposes, and the same market value is to be used as the acquisition cost of the asset when it is realised for the purpose of calculating the realised gain or loss. However, the insurer will normally be assessed on these gains or losses as part of its trade profits. If so it may elect, within two years of the end of the accounting period in which the transfer occurs, to assimilate any gain or loss that would result from the deemed CG disposal to its computation of trade profits on a later realisation (see CG69201).

On a transfer of an investment treated as ‘trading stock’ within the ICTA88/S100 meaning by the insurer to another company, the insurer is to be treated, for the purposes of TCGA92/S161, as having appropriated the asset for some purpose otherwise than use as trading stock immediately before transferring it.

This effectively fixes the cost price of the asset in the hands of the transferee at the amount that is treated as the proceeds of sale in computing the realised gain or loss (see CG69220). Normally this will be the actual consideration passing, unless this is so far removed from the market value as to cast doubt on the commercial bona fides of the transaction (see BIM33610).