LAM03060 - Calculation of ‘I’ Income and chargeable gains: Loan relationships, derivative contracts and intangible fixed assets: non trading treatment of credits and deficits: FA12/S74(1): FA12/S88 : CTA09/S388-391

For the purposes of the I-E rules, debits and credits on loan relationships, derivative contracts and intangible assets are deemed to be non-trading FA12/S88(2). The main practical consequence of this is that the rules for offsetting non-trading deficits, as described below, are more restrictive than for trading deficits.

Where, for a period, the total of BLAGAB loan relationships and derivative debits exceeds the total of BLAGAB loan relationship and derivative credits the excess is a single BLAGAB non-trading deficit.

This BLAGAB non-trading deficit must first be offset against other BLAGAB income and gains in the deficit period at step 4 of FA12/S73, before the deduction of BLAGAB management expenses. (CTA09/S388). The deficit offset will be limited to ‘I’ at step 1 plus ‘G’ at step 2 plus any S92 amount. In practice this means the deficit offset will not exceed zero. For this purpose, BLAGAB income and gains available for offset excludes any minimum profits amount under FA12/S93 – CTA09/S389((2A).

CTA09/SS389-391 sets out the rules for utilisation of any deficits that cannot be relieved against income and gains in step 4 of S73, these are illustrated below:

CTA09 Section	Utilisation of deficit available
S388	First offset non-trading deficit against BLAGAB income and gains in step 4 FA12/S73 (excluding S93 minimum profits test amounts). Any excess can be subject to a claim under S389
S389	Carry back claim for any remaining deficit for 3 accounting periods within the ‘permitted period’ ( 12 months before the deficit period) with most recent periods used first and set off the claim amount against ‘available profits’ (S390) in those periods
S391	any unused amount is carried forward to the next (accounting) period and treated as a ‘deemed BLAGAB management expense’ for that period LAM04200

Example 1

Example – calculation of ‘available profits’ for a carry back claim CTA09/S390

Company A writes only BLAGAB. In 2017 A has income and gains from Steps 1-3 of S73 of £300m, none of which arises from a minimum profits charge. It has a non-trading deficit of £750m, largely attributable to net losses on its bond portfolio. This leaves £450m of net deficit unrelieved and available for carry back under S389. The company has a calendar year end and therefore the ‘permitted period’ is year ended December 2016.

In 2016 Company A has total ‘I’ of £800m, which includes £500m of net loan relationship credits, and adjusted BLAGAB management expenses of £400m.

Company A 2016 Available profits S390	£’m	£’m	£’m
BLAGAB non-trading loan relationships profits in permitted period (2016) potentially available to offset excess deficits from 2017		500
Less unused part of relevant deductions for the permitted period (2016) S390(5)
Step 1: Add
Adjusted BLAGAB management expenses for period FA12/S73	400
Step 2: Add
Amount of adjusted BLAGAB management expenses that could be deducted at step 6 FA12/S73 to reduce to zero if there were no loan relationship profits	300
	(300)
Step 3: Deduct amount in step 2 from amount in step 1		(100)
Available profits – deduct result of step 3 from LR profits		400

The restriction ensures that the deficit carry back does not displace BLAGAB management expenses and does not reduce the I-E profit below zero. The total 2016 ‘I’ of £800m is now reduced to zero by £400m of management expenses and £400m of loan relationship deficits carried back. In 2017 the non-trading deficit of £450m that would otherwise be carried forward is reduced to £50m. This £50m will become a deemed management expense in 2018.

Similarly intangibles will result in a single non-trading BLAGAB income amount where, under CTA09/ Part 8 BLAGAB credits exceed BLAGAB debits. If debits exceed credits this will give rise a single BLAGAB non-trading deficit. Any BLAGAB non-trading deficit arising from intangibles is deemed to be a BLAGAB management expense of the period.FA12/S88(6). For accounting periods ended before 15th September 2016, a net non-trading deficit on intangible assets was carried forward to the next accounting period and treated as deemed management expenses of that period. Changes were made to align the treatment of life companies’ intangibles with other companies.

See also LAM15000 for summary of all the rules for all available loss offsets.