LAM02010 - I-E overview: background and policy objective

Insurance companies writing long-term business falling within the definition of BLAGAB must consider the application of the life tax I-E provisions in Part 2 of FA12.

The current position for taxing life companies has evolved over many years. The policy objective is to collect tax from the life company on the investment return accruing for the benefit of policyholders on BLAGAB policies. This is as a proxy for the policyholder paying tax at the basic rate of income tax. When the policyholder receives benefits under the policy, any taxable profits arising are taxed after giving credit for the basic rate of income tax. For a basic rate taxpayer, therefore, there is no further tax liability.

At the same time, the company must also pay tax at the CT rate on the company profits, on the same basis as other entities.

There is an overlap and interaction between the two tax objectives in trying to encompass these in one tax computation. This is one reason why a life tax computation involving BLAGAB may appear to be complex. LAM01160 has further explanations of the principles underlying the policyholder and company positions and the elements involved in the calculations.

Further information on the background to the introduction of the current life tax regime is set out in ‘long-term insurance business overview’ LAM01000. Familiarisation with the commercial, accounting and regulatory background set out in LAM01090 onwards is important in understanding the context for the I-E charge on profits.