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HMRC internal manual

General Insurance Manual

From
HM Revenue & Customs
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Mutual insurance: tax treatment: accounting periods beginning on or after 1 October 2002: loan relationships

The tax treatment of corporate and government debt - loan relationships - remains governed by Chapter 2 Part 4 FA 1996, re-enacted as Part 5 CTA 2009 (see GIM5120). Where a company carries on general insurance business on a mutual basis, FA96/S103 (3), re-enacted as CTA09/S298 (3)-(5) provides, as under the earlier rules, that the activities are not to be treated as constituting a trade or part of a trade. It follows that none of the rules applying to trading activities will apply to the profits and losses from loan relationships of such a company. Instead it will be treated as a non-trader for all purposes, so that the various special rules which apply only to non-traders will continue to apply to it:

  • index-linked gilts, where credits or debits are determined by reference to the value of the security at any time (FA96/S94, re-enacted as CTA09/S399) - note that this adjustment is made where the accruals basis applies as well as mark to market
  • gilt strips: where gilts are ‘stripped’ by being divided up into a number of gilt strips representing each interest payment and the principal payment, a company is deemed to have disposed of the gilt at its then market value and any profit or loss is brought into account in accordance with the appropriate basis as if the security had been redeemed - (FA96/S95 (2), re-enacted as CTA09/S401 (2)-(4))
  • gilt strips: where stripped gilts are reconstituted from a number of gilt strips representing each interest payment and the principal payment, a company is deemed to have disposed of each of the strips at its then market value and any profit or loss is brought into account in accordance with the appropriate basis as if the strip had been redeemed - (FA96/S95 (3), re-enacted as CTA09/S401 (5)-(7))
  • the two ‘protected’ gilts, 3½% Funding stock 1999-2004 and 5½% Treasury Stock 2008-2012 (FA96/S96, re-enacted as CTA09/SCH2/PARA69) where only interest is brought into account by the holder.

The rules for giving effect to loan relationships profits and losses are the non-trading rules, so that the aggregate of credits and debits representing those profits and losses is either an amount chargeable as investment income (CTA09 Part 5, formerly Case III) or a non-trading deficit which may be relieved as at FA96/S83 and FA96/SCH8, re-enacted as CTA09 Part 5 Chapter 16.