LAM12140 - International and cross border: CFC: avoidance of double charge: modification to TCGA92/S212 chargeable gains computation Regulations 2 and 6 of SI2012/3044
Although life insurance companies will have extensive holdings in offshore funds, potentially within the CFC charging provisions, in most cases these are not likely to incur a CFC charge. This is due to the basic operation of the rules – excluding bond funds, items within the non-BLAGAB computation and operation of various easement rules.
However, there may be some exceptions. Regulations 2 and 6 of SI2012/3044 aim to prevent double taxation if this does arise.
Relevant profits of the CFC could also be reflected in the value of the investment deemed to be disposed of by virtue of TCGA92/S212. In order to prevent a double charge the Regulations allow the market value used for the calculation under TCGA92/S212 to be reduced by the amount of the CFC profits.
Where the insurance company has received a distribution from a relevant CFC in the deemed disposal accounting period the reduction may have to be adjusted depending on the profits distributed. Therefore the Regulations allow a just and reasonable adjustment to be made to the market value.
The reduction for the CFC relevant profits is made on a cumulative basis.
Example
The initial investment in the fund is £100m, with closing value of £110m at end of Year 1 and £125m at end of year 2. The taxable (separately calculated) CFC profits are £2m in year 1 and £3m in year 2. The total increase in value of £25m is taxed in year 1 as to £2m CFC charge and £8m spread over 7 years under TCGA92/S212 and £3m in year 2 CFC charge and £12m under S212.
| Year 1 | Year 2 | Total | |
|---|---|---|---|
| Opening value | 100 | 110 | 100 |
| Closing value | 110 | 125 | 125 |
| Increase in value | 10 | 15 | 25 |
| Taxable CFC profits (assumed) | 2 | 3 | 5 |
| Taxable under TCGA1992/S212 | 8 | 12 | 20 |
| Total taxed | 25 |
The overall amount taxable amount over the two years of £25m, subject to the spreading rules, is made up of £5m CFC charge and £20m S212 taxable amount. The example deals with the typical case where the result of the S212 calculation is a gain – but it could equally well be a loss. The approach above will work equally well where losses are involved. However, where distributions are made the calculations become complex.
Distributions may be made out of earlier years’ and/or in year distributable profits. This means the potential for double counting can vary widely. In order to minimise the need for detailed rules to cover every situation, Regulation 6(3) allows for a just and reasonable adjustment to be made to the market value of the assets within S212 to eliminate any potential double taxation.