LAM11050 - Long-term business fixed capital: grandfathering: FA12/SCH17/PARA35 and FA12/S137

Transition to the long-term business fixed capital regime

The concept of a life insurance company having long-term business fixed capital (LTBFC) was introduced with the current life tax regime from 1 January 2013. Transitional rules are in FA12/SCH17/PARA35 and PARA35A.

Under the previous life tax regime (to 31 December 2012), life insurance companies could hold assets outside the long-term fund. These assets were returned in Form 13 of the regulatory return as ‘other than long-term insurance business assets’ commonly known as the ‘shareholder fund’. The current life tax regime from 1 January 2013 takes no account of a “shareholder fund” as the tax is based on the financial statements, not the regulatory return. In addition, under Solvency II, the previous distinction between the long-term fund and shareholder fund has disappeared and companies generally show all their assets as available to back long-term insurance liabilities.

As part of the transition to the current life tax regime (from 1 January 2013), PARA35 regards assets held in the shareholder fund at 31 December 2012 as assets forming part of the LTBFC of the company. This is regardless of whether or not they would otherwise qualify as LTBFC under the new rules in FA12/S137.

However there is an exception to this grandfathering provision. If the investment return arising from such assets was reflected in the I-E computation or the trade profits for any period of account ending prior to 1 January 2013, the underlying asset will not be treated as part of the LTBFC.

Replacement of grandfathered assets

If a grandfathered asset is sold and the proceeds used to acquire a new asset, it will be necessary to consider FA12/S137 to determine, on a factual basis, whether or not the new asset qualifies as LTBFC. If necessary, an analysis of the facts will be required to establish whether or not the new asset is a structural asset.

Where a replacement asset does not qualify as LTBFC it should be regarded as a trading asset held for the purposes of the long-term business. This is unless the facts show that the asset is held for a general insurance business or, exceptionally, another purpose which clearly sets it outside the long-term insurance business.