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HMRC internal manual

International Manual

HM Revenue & Customs
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Distribution exemption: Interpretation: life insurance companies

Rules for life insurance companies

FA89/S85A (excess adjusted trading profits) and FA89/S89 (policy holders’ share of profits) now refer to “non-taxable distribution” in place of the previous formula that referred to dividends from UK companies. Non-taxable distribution is now defined at FA89/S85A(6A) in terms that exclude any foreign dividend withholding tax.

In certain circumstances the effect of this can be to affect the net UK tax charged after the foreign dividend exemption.


BLAGAB overseas dividends are 1000 after foreign tax of 200 has been withheld. Other BLAGAB (loan relationships) income is 1000.

Before the foreign dividend exemption, life trading profits after deducting withholding tax are 2000. Tax payable is 2000 @ 28% less credit for withholding tax of 200, 560 - 200 = 360. There is no adjustment under FA89/S85A because the I - E result is equal to the trading profit after withholding tax credit.

After the foreign dividend exemption, the I - E result is BLAGAB income of 1000 to which for comparison purposes is added the foreign dividends net of withholding tax (1000 - 200 = 800), which gives 1800. The trading profit is 2000 as before. There is therefore a FA89/S85A profit of 200, which must be added to the I - E result of 1000 giving 1200. Tax payable @ 28% is 336.

It might have been thought that net UK tax on foreign dividends of 80 (1000 @ 28% less 200) would be saved, but in fact the benefit is 24. The difference of 56 is tax @ 28% on the 200 withholding tax.