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HMRC internal manual

General Insurance Manual

Equalisation reserves: the tax rules: cessations

Where a company ceases to trade, ICTA88/S444BA (3) requires the whole of the equalisation reserve to be transferred out immediately before the cessation. Where there is a separate tax calculation of equalisation reserves the transfer out will be limited to the level of the reserve in the tax calculation (referred to in the legislation as the reserve which exists at that time for the purposes of the Tax Acts). Any such transfer out will be treated as a trade receipt of the final year of trading.

If a company merely ceases to write a particular line of business, or if it ceases to write any new business without ceasing to trade, the reserve will run down naturally because of the reduction in the reserve maximum.