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HMRC internal manual

General Insurance Manual

Taxation of the investment return: investment gains: structural assets

Insurers may argue that part of their portfolio of investments consists of core funding or structural assets. They may claim that gains on the disposal of such investments should be taxed as chargeable gains (or, from 1 April 2002, may be exempt under the substantial shareholdings rule in TCGA92/SCH7AC), and that the realisation or mark to market bases do not apply.

CIR v Scottish Automobile and General Insurance Ltd 16TC381 may be cited in support of this view, but the facts in that case were unusual, and it stands as an exception to the general rule. Doubt was cast on it in Punjab Co-operative Bank, Amritsar v ITC [1940] AC 1055, and it does not sit easily with the decision in General Reinsurance Co Ltd v Tomlinson 48TC81 - see GIM5150.

The special status of the investments of an insurance company was recognised in the more recent Nuclear Electric plc v Bradley case, 68TC670, and the quotations repeated at GIM5020 are useful in showing the current thinking of the courts.

Shares in subsidiaries

The status of shares in subsidiaries and associated companies is rather more complicated. The shares in a subsidiary which is itself carrying on insurance business, or some related activity in the financial sector, are not usually held in order to be turned over as part of the investment portfolio. In the last resort they might have to be sold in order to meet claims, but they are not held for this purpose. On the other hand insurers may hold certain types of investment, such as farm land or a portfolio of investments, through subsidiaries for non-tax reasons. The sale of the shares in such a subsidiary might well be assessable as a trade profit, depending on the facts. The status of subsidiaries affects not only the eventual sale proceeds but also the treatment of unrealised gains and losses where mark to market applies, and grouping issues.

Certain reliefs, elections and treatments may not apply where assets are of such a nature that a profit on their disposal falls to be treated as a trading receipt. Group relief for losses may be ruled out by ICTA88/S413 (5)(a) which prevents any share capital, the profit on sale of which would be a trading receipt being taken into account in determining whether a company is a 75% subsidiary for group relief purposes. There are similar provisions in ICTA88/S402 (4) (consortium relief), regulation 6 SI1999/358 (shadow ACT) and FA89/S102 (surrenders of tax refunds within a group).