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HMRC internal manual

Insurance Policyholder Taxation Manual

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HM Revenue & Customs
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Policies and contracts owned by companies: application of the loan relationships rules: non-trading credits and debits

Where the loan relationships rules apply to an investment life insurance contract to which a company is party, the company must bring into account non-trading credits and debits for each accounting period following its accounting treatment of the contract in a similar way to other loan relationships to which the company might be a party. The procedure for entering credits and debits on the Company Tax Return (CT600) is the same as for other non-trading loan relationships. Credits must be included in box 6, debits of the accounting period in box 28 and debits brought forward in box 20.

There are two circumstances where a company may need to bring in credits and debits on an investment life insurance contract. Firstly, annually based on changes in the carrying value of the contract in the company’s accounts and secondly, where there is a disposal of rights under the contract.

Annual non-trading credits and debits on an insurance contract

Credits and debits will normally only arise on a year by year basis where the company recognises an insurance contract at fair value, current cost or amortised cost basis. The relevant credit or debit to be brought into account will follow from the annual movement in the value of the contract. This is subject to the application of a transitional rule where the contract is accounted for at fair value, was held at the start date and the “cost” - broadly premiums paid less sums previously paid out under the policy - exceeds the fair value at the start date. It ensures that a company is not taxed on annual gains until the value exceeds this cost - see IPTM3935.

Where, as will often be the case, the company accounts for an insurance contract on historic cost basis there will be no annual debits or credits because the value in the accounts will remain the same each year, namely at original cost. This is subject to a transitional rule that applies where the policy is accounted for other than on fair value and the carrying value exceeds the fair value at the start date. It ensures that a company cannot obtain a deduction for a debit that relates to loss on a contract that arose before the start date - see IPTM3940.

Credits and debits on a disposal

Where there is a disposal of all or part of the rights under the insurance contract, including a whole or part surrender or assignment, the maturity, or on death or critical illness, this is a ‘related transaction’ within the meaning of the loan relationships rules (CTA09/S304). A profit or loss may arise on this related transaction calculated in accordance with accounting standards used by the company, subject to the exception described in IPTM3915 where rights under the policy are extinguished on the death or critical illness of a life assured.

The profit or loss on a related transaction is treated as a loan relationships non-trading credit or debit of the company.

There is a special rule that applies to non-trading credits on disposals where the insurance contract is part of business that has borne tax at the insurance company level on income and gains on the underlying assets held by the insurer. It gives a measure of relief similar to the basic rate tax treated as paid on chargeable event gains on policies owned by non-corporates, which was not available to companies taxed under the chargeable events rules. IPTM3920 explains the mechanism for giving this relief.

Acquisition of further rights under the policy

The company may acquire further rights under the insurance contract by payment of additional premium or through assignment. If so, these additional rights may also give rise to credits or debits annually or on disposal.

Further reference and feedback IPTM1013