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HMRC internal manual

Insurance Policyholder Taxation Manual

HM Revenue & Customs
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Policies and contracts owned by companies: application of the loan relationships rules: transition from chargeable events rules: contracts accounted for on fair value basis

There is a transitional rule that applies where

  • a company is party to an investment life insurance contract immediately before the ‘start date’ (the start date is the first day of the first AP of the company to start on or after 1 April 2008) and was always the beneficial owner of the rights under the contract,
  • the company accounts for the contract at fair value, and
  • the ‘cost’ of the contract exceeds the fair value of the contract at the start date. In this context, for a life policy or capital redemption policy “cost” means

    • the amount paid by way of premiums, less
    • the amount of any relevant capital payments previously paid under the policy, within the meaning of ICTA88/S541(5)(a). If these conditions are met then no credits that arise on the contract will be brought into account under the loan relationships rules until the total credits is greater than the amount by which cost exceeds the fair value at the start date. In other words, taxable non-trading credits will only begin to arise on the contract once the fair value exceeds the cost.

Example The company’s AP is to 30 June each year and it uses fair value accounting. It took out a policy on 10 March 2002 and paid premiums totalling £15,000 up to 30 June 2008. It surrendered part of the policy for £2,000 on 27 April 2005. The fair value of the policy was £10,500 on 30 June 2008, £12,000 on 30 June 2009, £14,500 on 30 June 2010 and £13,500 on 30 June 2011.

AP ended 30 June 2009: The ‘cost’ of the policy at the start date of 1 July 2008 is £13,000, namely premiums paid of £15,000 less payment on earlier part surrender of £2,000. This exceeds the fair value immediately before the start date by £2,500. Although there is an annual credit of £1,500 relating to this AP (£12,000 - £10,500) it is less than £2,500 so is not brought into account.

AP ended 30 June 2010: There is an annual credit of £2,500 (£14,500 - £12,000). Since total credits since 1 July 2008 of £4,000 are greater than £2,500 (the excess of cost over fair value at start date), the difference of £1,500 is now brought into account as a non-trading credit.

AP ended 30 June 2011: There is an annual non-trading debit of £1,000 (£13,500 - £14,500) which can be deducted in the company’s tax computations in the same way as non-trading credits generally under the loan relationships rules.

The transitional rule is no longer relevant and any future credits on the contract will be taxable as non-trading credits in the normal way.

Further reference and feedback IPTM1013