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HMRC internal manual

Insurance Policyholder Taxation Manual

Policies and contracts owned by companies: application of the loan relationships rules: tax treated as paid: description of mechanism

There is a mechanism in the rules that broadly treats tax as being paid at a rate equal to the basic rate of income tax on non-trading credits on a related transaction on certain insurance contracts. This special rule recognises that in some cases the insurer, particularly a UK insurer, will have borne tax on the income and gains on the assets in the funds underlying the contract.

The special rule does not allow for tax treated as paid where an annual non-trading credit arises on a contract owned by company that uses fair value accounting. However, it does take account of the earlier credit in allowing relief when there is a subsequent disposal of rights under the contract, as the example in IPTM3925 shows.

Where tax is treated as paid, it may be set against the company’s liability to corporation tax (CT) for the accounting period (AP) in which the related transaction arises. However, where it exceeds the company’s liability to CT, the excess is not repayable to the company and nor can it be set-off against CT in any other accounting period. The amount of tax treated as paid which can be set-off should be entered in box 88 of the Company Tax Return (Full form CT600). Any excess tax treated as paid must not be included in box 88, to ensure that no part of any tax repayable includes tax treated as paid.

Insurance contracts where tax is treated as paid

The special rule applies where the insurance contract

  • forms part of the basic life assurance and general annuity business (BLAGAB) of a UK insurer, other than tax exempt friendly society business - so is taxable under the ‘I-E’ system, or
  • is subject to a relevant comparable EEA tax charge - the definition of this is in CTA09/S564 (previously FA08/SCH13/PARA3(6)) but broadly, it refers to overseas insurers who operate a similar system of taxation of insurers to the UK’s ‘I-E’ system.


Mechanism for calculating tax treated as paid

Where the company uses historic cost or amortised cost accounting

The non-trading credit (NTC) on the related transaction is treated as ‘grossed-up’ by an appropriate percentage rate AR, that is, it is increased by NTC x AR/(100 - AR). The amount by which the NTC is increased is the amount of tax treated as paid.

“AR” is the corporation tax rate that applies under the I-E system to the policyholder’s share of income and gains of the insurer, which is currently 20% (equivalent to the basic rate of income tax).

Where the company uses fair value accounting

The calculation described above is slightly different where the company uses fair value accounting. Instead, the amount by which the non-trading credit on the related transaction is grossed up and treated as tax paid is PC x AR/(100 - AR).

Where the related transaction is the disposal of all the rights under the policy, “PC” is the profit from the contract defined as

  • the amount payable on the related transaction, less
  • the fair value of the contract on the later of
    • the date that the contract was made, and
    • the start of the company’s first AP to begin on or after 1 April 2008.


Where the related transaction is disposal of part of the rights (on part assignment or part surrender), the calculation of PC is similar, except that only the proportion of the fair value of the contract relating to the part disposed of is deducted (in the second bullet above). The proportion to be applied is C/FVC, where C is the amount payable on the disposal and FVC is the fair value of the contract immediately before the disposal.

IPTM3925 gives some examples of calculations involving tax treated as paid.

Further reference and feedback IPTM1013