LAM03230 - Calculation of ‘I’ Income and chargeable gains: Transactions in shares: share pooling rules: FA12/S119-121
Life insurance companies have been active in acquiring equities over many decades. They are one of the largest groups of institutional shareholders and one of the largest categories of corporate investors taxed on profits on a chargeable gains basis. Most holdings in quoted companies are of ordinary shares, but life companies may also hold preference shares, particularly in unquoted companies.
The general share identification rules for companies CG51600 apply to life insurance companies. Part of those rules include the capital gains tax pooling rules in TCGA92/S104. Those pooling rules are not sufficient for life insurers because pooled shares under S104 may be held to back different types of business. Accordingly, there are special share pooling rules for insurance companies in FA12/S119, which follow a similar pattern to the box transfer rules LAM03210. For share pooling purposes the following categories are regarded as separate holdings of securities:
- matched to BLAGAB liabilities
- matched to other LT liabilities
- not matched and in a with-profits fund
- not matched and not in a with-profits fund
Diagram showing categories of securities held for long-term business
If there is more than one with-profits fund in the insurance company, each with-profits fund is treated as a separate holding for share pooling purposes FA12/S119(2).
Chargeable gains accruing on assets that are not matched are subject to apportionment if liabilities include a mix of BLAGAB and non-BLAGAB.
‘Assets matched to liabilities’ is defined in FA12/S138. An asset is matched to a liability if, in accordance with the ‘applicable method’ (broadly commercial allocation LAM05020), some or all of the income or other return arising from that particular asset is specifically referable to that category of business.
To be ‘specifically referable’ the allocation of the income or other return is a consequence of a contractual requirement imposed on the company relating to the category of business- FA12/s138(8).
This enables chargeable gains relating to assets held to back all unit-linked life policy liabilities to be identified and calculated as if there was a single separate pool of assets. Under the terms of the relevant policies, an appropriate rate of tax on those profits will be charged to each of the individual unit-linked funds and deducted in determining the liability to policyholders.
Where there are securities in a life company that are not regarded for tax purposes as held for the purposes of the long-term business, there is a fifth pool of securities that are held otherwise than for the purposes of company’s long-term business FA12/S119(1)(e)). Assets treated as long-term business fixed capital LAM11030 fall into this category.
The share pooling rules for securities held for long-term business do not apply where all the income of the company’s long-term business is chargeable to CT under the trading rules S119(3). In that case there will be two separate holdings: one for securities held for long-term business and, exceptionally a second for securities held otherwise than for the purposes of its long-term business FA12/S119(4). Within the holdings required by S119 there may of course be a number of pools under the provisions of TCGA92, such as 1982 holdings CG51630P.
FA12/S120 applies the share pooling rules to the securities attributed to the UK permanent establishment through which an overseas life insurance company carries on life insurance business.