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HMRC internal manual

Insurance Policyholder Taxation Manual

Policies and contracts owned by companies: application of the loan relationships rules: transition from chargeable events rules: contracts accounted for other than on fair value

There is also 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)
  • the company accounts for the contract other than at fair value, and
  • the carrying value of the contract exceeds the fair value at the start date.If these conditions are met then no non-trading debits can be brought into account on the contract until they exceed the amount by which carrying value exceeded fair value immediately before the start date. In practice, surrender value can normally be taken as fair value. This rule only affects the treatment of debits that arise after the start date. It does not affect the treatment of future credits.

ExampleThe company’s AP is to 30 September each year. It took out a policy on 15 February 2004 with premium of £10,000, which was also the original cost of the contract. It accounts for the policy using historic cost basis.

It surrendered 25% of the rights under the policy on 27 June 2007 for £2,200. The surrender value of the policy on 30 September 2008 is £6,500. The company surrenders a further 50% of the original rights under the policy on 22 May 2010 for £3,500.

AP ended 30 September 2009: The start date is 1 October 2008. The historic cost of the policy immediately before the start date is £7,500 (75% x £10,000, because 25% of the policy has already been surrendered) which exceeds the surrender value (fair value) on that date by £1,000, so the transitional rule applies. This means that the company cannot bring any debits into account in future until they exceed £1,000.

This is of no consequence for this AP since there are no related transactions during the year and as historic cost accounting applies no annual debit or credit arises for this AP.

AP ended 30 September 2010: The part surrender in the year for £3,500 is a related transaction. The cost of the part surrendered is £5,000 (50% x £10,000). Therefore there is a non-trading debit of £1,500 (£3,500 – £5,000). However, only £500 of this debit can be brought into account, since the £1,000 that relates to the period before the start date is not allowed under the transitional rule.

Further reference and feedback IPTM1013