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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: tax treated as paid: examples

The following examples assume a UK life policy that is an investment life insurance contract (IPTM3900) forming part of the insurer’s BLAGAB business so the rules giving relief for tax treated as paid apply (IPTM3920).

Contract accounted for on historic cost basisCompany with normal accounting date 31 December took out a policy on 10 March 2004 with a premium of £10,000. It surrenders 25% of the policy on 5 February 2009 for £4,000.

There is a non-trading credit on the disposal: proceeds £4,000 less cost £2,500 (25% x £10,000) = £1,500. This must be grossed up by £1,500 x 20%/(100 - 20%) = £375 and a non-trading credit of £1,875 must be brought into account in the company’s CT computation for the AP to 31 December 2009. Tax treated as paid of £375 is available for set-off against the company’s liability to CT for this AP.

Contract accounted for on fair value basis This example shows how tax treated as paid is calculated for a contract accounted for at fair value where there is a part surrender.

Company with accounting date 30 June takes out a policy on 15 July 2008 with premium of £20,000 and this is also the initial fair value (FV). The FV of the policy at 30 June 2009 is £22,000 and at 30 June 2010 it is £21,500.

The company surrenders 50% of the rights under the contract policy on 5 October 2010 for £12,000, and the FV immediately before the part surrender is £24,000. FV at 30 June 2011 of the rights under the contract retained by the company is £12,750.

AP ended 30 June 2009: There is a non-trading credit of £2,000 (£22,000 – £20,000, the increase in value of the policy over the AP). No tax is treated as paid as no related transactions have occurred during the year.

AP ended 30 June 2010: There is a non-trading debit of £500 (£21,500 – £22,000).

AP ended 30 June 2011: There is a non-trading credit on the part disposal on 5 October 2010 of £1,250 (before the increase for tax treated as paid), calculated as proceeds £12,000 less the proportion of the FV of the contract at the previous AP end-date relating to the part disposed of (50% x £21,500).

This is a related transaction so tax is treated as paid. C (the amount payable on the disposal) is £12,000 and FVC (the fair value immediately before the part surrender) is £24,000, so the proportion C/FVC is 50%.

PC is then £2,000, namely £12,000 less 50% x £20,000, which is the FV of the contract when it was made (which is after 1 July 2008, the start of the company’s first AP to begin on or after 1 April 2008).

The amount by which the non-trading credit is increased is then PC (£2,000) x 20%/(100- 20%) = £500, and this is also the amount of tax treated as paid. So, the non-trading credit relating to the part disposal is £1,250 + £500 = £1,750.

There is also an annual non-trading credit relating to the movement in value over the AP of the part of contract retained: FV at 30 June 2011 (£12,750) less 50% x FV at 30 June 2010 (£10,750) = £2,000.

In summary: There are non-trading credits totalling £3,750 (£1,750 + £2,000) for the AP ended 30 June 2011 and tax treated as paid of £500, which is available for set-off against the company’s liability to CT for that AP.

Further reference and feedback IPTM1013