LAM12400 - Corporate Interest Restriction

The corporate interest restriction (TIOPA10/PART10 and SCH7A) (CFM95000) aims to restrict a group’s deductions for interest expense and other financing costs to an amount which is commensurate with its activities taxed in the UK, taking into account how much the group borrows from third parties. As with all other corporates, groups which contain insurance companies are within the scope of the corporate interest restriction,

The generation of interest income from invested premiums is a key part of an insurance company’s business and they are normally expected to be net tax-interest income recipients by a significant margin. However, the fair value of an insurance company’s investment in long-term debt can be subject to considerable volatility. Large falls in the fair value of debt could impact on the group’s net tax interest position, even pushing it into a net expense position for an accounting period although the long-term position is clearly one of being a net interest recipient. To avoid the compliance burden that this would entail insurance companies can make an irrevocable election under TIOPA10/S456 to use an amortised cost basis for all its creditor loan relationships when determining the group’s net interest position. CFM97525 gives more details of the impact of making such an election.

An insurance company’s net interest position could shelter the interest expense of a subsidiary. Where the subsidiary carries on a business unrelated to insurance and the insurance company holds the subsidiary as an investment, the subsidiary will not be regarded as a member of the same group as the insurance company for corporate interest restriction purposes (see CFM97525).