LAM03010 - Calculation of 'I' Income and chargeable gains: Income and gains within ‘I’: Overview of tax basis
The income and chargeable gains of a life company referable to BLAGAB are charged to tax as part of the ‘I-E’ profit in FA12/S68 and are calculated in accordance with steps 1 to 4 in FA12/S73. This chapter explains the tax treatment of the main sources of investment return within a life company as part of that calculation.
Life insurance companies typically have extensive investment portfolios and may have a number of internal fund structures such as with-profits funds all of which can add to the complexity of computing ‘I’. Life insurers may hold equities, bonds, derivatives, property etc. These investments can be held directly or via an investment vehicle such as a unit trust, Open Ended Investment Company (OEIC), partnership or other structure appropriate for holding the relevant assets. Analysis of the portfolio requires a detailed review of the portfolio assets and their respective tax treatment.
The steps to calculate ‘I’ are (diagram):
| Steps in S73 FA12 | Guidance and main features |
|---|---|
| Step 1 - Calculate income referable to BLAGAB | LAM03030 FA12/S74 definition of income. Principal income sources are generally loan relationships and derivatives taxed as non-trading loan relationships on a mark to market basis and property business profits (property business is taxed as a separate business). Income from equities - dividends mostly exempt. |
| Step 2 - Calculate/identify net chargeable gains referable to BLAGAB | LAM03200 FA12/S75 total long-term business chargeable gains as adjusted for allowable losses. Realisation basis for equities, property and other investments which are chargeable assets. Annual deemed disposal rules for collective investment vehicles e.g. authorised unit trusts and OEICs, but excluding bond funds LAM03300. Special rules for transfers within the life company between ‘boxes’ LAM03300 and for transfers to and from a life company within a group LAM03220. |
| Step 3 - Identify additional ‘deemed’ receipts and any minimum profits charge | LAM03500 FA12/S92 - certain receipts included in the calculation of BLAGAB trade profits but not already included at steps 1 or 2. LAM03510: FA12/S93-94 I-E adjustment for minimum profits test. |
| Step 4 - Add results of steps 1-3, deduct any non-trading deficit - result is ‘I’ | LAM03520 CTA09/S388 loan relationship and derivative contracts deficit of the period referable to BLAGAB. Result cannot be negative. After 15 September 2016, the amount of the non-trading deficit that can be deducted is limited to the total of Step 1 plus Step 2 and S92 amount. |
The tax basis of BLAGAB income and gains is more aligned with the treatment of investment companies with adaptations and differs significantly from the trading basis for non-BLAGAB income and gains. Contrast mark to market taxation of non-BLAGAB long term business investment gains with BLAGAB chargeable gains taxed on a realisation basis and deemed disposal rules for certain collectives. Dividend taxation in non-BLAGAB is another significant difference.
The differences can also impact, for example, on the tax treatment of movements of assets within life companies (see, for example, ‘box transfers’ LAM03210) and within groups containing a life company.
There are also special provisions for reinsurance of BLAGAB business. These are explained in LAM10100 onwards.