LAM10010 - Reinsurance: Introduction to the taxation of life reinsurance

Where all of a company’s life insurance business consists of reinsurance business the normal rule is that its profits are assessable as trading income under CTA09/S35. Taxing reinsurance as a trade reflects the nature of the business which is confined to reinsuring risks from other insurers.

However where a company taxed under I-E reinsures the investment risks of its BLAGAB policies there are special rules in place to prevent erosion of the I-E tax base. In the absence of those provisions an insurer writing BLAGAB could, for example, arrange to reinsure BLAGAB to a connected company that is not within the I-E regime or a non UK company not within the charge to UK tax. If the assets backing the liabilities pass to the reinsurer there may be no (or reduced) investment return in the cedant to which the I-E basis can apply.

A company may also reinsure its pension business but, as that falls outside I-E, these special rules do not apply.

This chapter covers:

  • a brief overview of commercial reinsurance business LAM10020-10040
  • an explanation of the special rules related to reinsurance of BLAGAB that may apply to both reinsurers and insurers LAM10200-10320
  • a reference to the treatment of BLAGAB group reinsurers LAM10400

A basic understanding of reinsurance and its commercial function is important to put in context the special rules set out here. It is also helpful in the context of assessing tax risk, particularly in relation to BLAGAB reinsurance and cross border reinsurance transactions. Fuller explanations of commercial reinsurance are available on external websites.