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HMRC internal manual

General Insurance Manual

Equalisation reserves: the tax rules: mutuals and partial mutuals

See GIM9000 for a discussion of mutuality.

A mutual insurer will be taxed only on its investment income and chargeable gains. As neither underwriting income nor expenses are taken into account for tax purposes, transfers into, and out of, the regulatory equalisation reserve will have no tax consequences for insurance companies conducting business on a mutual basis.

In most cases, an insurance business is either wholly mutual or not mutual; but as explained in GIM9040 there is a limited range of circumstances in which it may be appropriate to divide the business into mutual and non-mutual parts for tax purposes. The tax Regulations provide special rules for apportioning the transfers in and out of an equalisation reserve in these exceptional cases.

Partial mutuals

Although it is possible for an insurance company to operate partly on a mutual basis and partly not, the regulatory rules generally make no distinction between the two types of business.

A single equalisation reserve will be maintained for any relevant business, whether mutual or not. For tax purposes the movements in the equalisation reserve attributable to the non-mutual part of the business need to be identified so that correct tax relief can be given.

Regulation 6 of the tax Regulations provides that in these circumstances a separate reserve is calculated for tax purposes. This is based on the figures used for regulatory purposes, but takes account only of those premiums and claims that relate to the non-mutual part of the business. Tax adjustments are then made for the transfers into and out of this ‘shadow’ reserve. See GIM7230 on shadow reserves.

Tax relief may be waived in the normal way (GIM7250), and double taxation relief calculations are based on the shadow reserve.