LAM06020 - I-E Profit: Calculation of the tax charge: Determining the policyholders’ share of I-E profit: the policyholders’ share: FA12/S103

A mechanism is required to determine how much of the total I-E profit is attributable to policyholders (and is charged to corporation tax at the basic rate of income tax) and how much is attributable to shareholders (and is charged to corporation tax at the main rate for that year). FA12/S103 provides that mechanism and delivers a set of rules to determine the policyholders’ share of the I-E profit. Any amount of I-E profit that is not attributable to policyholders is treated as shareholder’s profit.

In the case of a mutual life insurance company FA12/S103(2) provides that all of the I-E profit is attributable to policyholders.

For all other cases where there is an I-E profit, a comparison is made between the I-E profit and “the adjusted amount” (see LAM06030) of BLAGAB trade profit for the period to calculate the policyholders’ share of the I-E profit (if any).

There are three possible outcomes when making this comparison:

  1. if the company does not have a BLAGAB trade profit for that period, the policyholders’ share of the I-E profit is the whole of that profit;
  2. if “the adjusted amount” of a company’s BLAGAB trade profit is less than the I-E profit for the period, the difference between those amounts represents the policyholders’ share;
  3. if “the adjusted amount” of a company’s BLAGAB trade profit is equal to or more than the I-E profit for the period, there is no policyholders’ share.

The second scenario above results in the I-E profit being split between shareholders and policyholders. When this occurs, two rates of tax will be charged.

The first slice of the I-E profit (up to “the adjusted amount” of BLAGAB trade profit) will be charged at the main shareholder corporation tax rate for the period. The balance will be charged at the policyholder rate of tax (basic rate of income tax).

For a numerical example of the different scenarios possible when calculating the policyholder’s share of the I-E profit, see LAM06050

FA12/S104 provides the rules for calculating the adjusted amount of BLAGAB trade profits (see LAM06030).

The S103 calculation is also used for the purposes of FA12/S95 ‘Use of non-BLAGAB allowable losses to reduce I-E profit’. See LAM03410.