LAM05040 - Apportionment rules: Acceptable commercial method: BLAGAB income, chargeable gains and expenses: FA12/S97-101

This section summarises the apportionment rules in FA12/Chapter 4 and references to further explanations.

The basic requirement is that amounts should be determined using an ‘acceptable commercial method’ which must fairly reflect the individual definitions for each category. In most cases, it is the allocation of income and gains that requires the most attention. This is because life insurers will often hold assets that are not separately identified as backing either BLAGAB or non-BLAGAB - the same pool of assets backs both types of business.

The items allocated under FA12/S97 to 101 are:

  • income items listed in s74(1)
  • chargeable gains and allowable losses
  • debits and other losses listed in s98(6)
  • expenses

Capital allowances on management assets are allocated using FA12/Chapter 7 rules (CAA01/S255(2)).

The allocation of income and gains should reflect the way in which the life insurer itself allocates the income and gains from its assets to the underlying policies. At a high level, the income and gains allocation consist of:

Factual (direct) allocation of income and gains

  • when assets are wholly or partly matched to BLAGAB liabilities (FA12/S100 for example, assets matched to unit-linked policies LAM05050) or
  • when the underlying accounting records allocate income and gains from specific pools of assets to underlying policy liabilities LAM05050.

Indirect allocation of income and gains

  • using an indirect method that produces a fair result (for example, asset share for with-profits business LAM05060).
  • using mean policyholder liabilities as an allocation basis.

Expenses may be allocated to specific products on a factual basis but other methods may be used, such as allocation based on allocation keys.

Note that chargable gains are calculated on the disposal or part disposal of a whole asset and the resulting gain or loss is then apportioned according to the commercial method. Apportioning chargeable gains may be more complex, if for example assets disposed of have been held over a period when the proportions of BLAGAB to non-BLAGAB have changed significantly (LAM05100).

The fund structure will also influence the allocation method and needs to be understood. For example a company with only unit-linked business will have assets directly matched to specific business so the direct or factual allocation required under FA12/S100 is straightforward LAM05050. For a large with-profits fund, the allocation method may require a mix of matching, ring-fencing, asset share or other indirect methods (LAM05070).

Trade profit allocations should be on a consistent basis with the S97 to 101 allocations – see LAM05110.