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HMRC internal manual

General Insurance Manual

Equalisation reserves: the tax rules: parts of reserves built up prior to the tax rules

Tax relief is given on credit insurance equalisation reserves built up in accounting periods ending on or after 23 December 1996. Transfers into the reserve will be allowed as a deduction in computing the profits of the insurer’s trade. Transfers out of the reserve will be treated as a receipt of the trade.

The tax rules governing non-annual accounting GIM7220 and overseas insurers GIM7280 apply to credit equalisation reserves.

The regulatory reserve may take account of reserves built up under different rules before 1996. Because no tax relief was available on these existing reserves, transfers out of the regulatory reserve are not taxed to the extent that they relate to these pre-existing, unrelieved reserves. Transitional rules are provided in Part 3 of the tax Regulations, which, together with regulation 3, allow a separate computation of the credit insurance equalisation reserve to be made for tax purposes, taking no account of reserves accumulated prior to the start of the tax relief scheme.

This separate calculation is maintained until the tax and regulatory reserves coincide.