LAM13040 - Transfers of long-term business: The taxation of insurance business transfer schemes: FA12/S128-135 and FA12/SCH17

Introduction

FA12/Part 2/Chapter 10 covers transfers of long-term insurance business. The rules apply to transfers taking place on or after 1 January 2013.

Most schemes to which the provisions apply are those in FSMA00/S105. This includes transfers of insurance business that result in the insurance business being carried on in an EEA state (including the UK) of:

  • business carried on in the EEA by a UK authorised person.
  • reinsurance business carried on in a UK establishment by an EEA firm.
  • business carried on in the UK by an authorised person, not a UK authorised person or EEA firm, who has permission to undertake the business.

Section 105 excludes 5 specific cases of transfers of insurance business from FSMA/Part VII. However FA12/S139(1) (Minor definitions) provides a separate and much wider definition of “insurance business transfer scheme” for tax purposes, extending the definition to include the excluded schemes described in cases 2 to 5 of FSMA/Section 105(3) as well as all non-EEA branch transfers. Thus while the schemes to which the provisions will apply include all Part VII schemes, the scope is wider than that. In practice most schemes will be Part VII schemes.

FA12/S152(2) provides that FA12/Part 2/Chapter 10 applies to Friendly Societies. These are discussed separately at (LAM13090).

Continuity of treatment for the transferor’s BLAGAB management expenses and allowable (chargeable gains) losses is provided by FA12/S128, TCGA92/S211, S211ZA and S213. Where the transferor has excess BLAGAB expenses, and/or a balance of spread acquisition expenses, relief is given to the transferee on the same basis that the transferor would have enjoyed.

These transfer of business rules also apply to friendly societies in the circumstances described in FA12/S152(2) even if an insurance business transfer does not actually take place. For example the conversion of a friendly society.

The transfer of BLAGAB and non-BLAGAB trade losses is also permitted by CTA10/S944-S944A.

Assets within the chargeable gains rules are subject to a no gain/no loss disposal on a transfer of business of the transferor’s long-term business to a transferee (TCGA92/S211). However this is subject to TCGA92/S212 which provides for the annual deemed disposal at market value of certain fund investments and the spreading of the resulting gains and losses. The balance of the spread gains and losses pass to the transferee and are recognised as if no transfer of business had occurred (TCGA92/S213(5)) (see LAM03300).

It also needs to be borne in mind that if, as a result of a business transfer, an asset moves between the categories in FA12/S117 then a box transfer will occur resulting in a deemed disposal at fair value (FA12/S118).

S211ZA(4)-(6) also allows the carry forward of unused capital losses to the transferee. The BLAGAB allowable losses transferred are deemed to be BLAGAB allowable losses accruing to the transferee in the accounting period of the transferee in which the transfer takes place, but those losses are not allowable as a deduction from chargeable gains accruing before the transfer takes place. For the purposes of TCGA92/S210A (ring-fencing of losses), the shareholders’ share of those losses is to be taken to be the same proportion as would be the shareholders’ share of them if they had remained losses of the transferor.

The remainder of FA12/Part 2/Chapter 10 is concerned with the calculation of both BLAGAB and non-BLAGAB trade profits and also introduces an anti-avoidance rule (see LAM13080).

Under the FA12 corporation tax provisions for long-term business, trade profits or losses are calculated by reference to a company’s statutory accounts. The starting point for calculating trade profits or losses arising on a transfer of business is therefore also the statutory accounts. A different taxation treatment is applied to intra-group transfers, that are not transfers into or out of a with profit fund, compared with other transfers. (see LAM13050). The trade profit rules, which are in FA12/S129 and 130, are expressed in terms of BLAGAB, although FA12/S131 provides that the rules also apply to non-BLAGAB business

The transitional provisions in FA12/SCH17/PARA13-14 contain some specific rules which apply to transfers of business which occur within the 10 year spreading period for deemed receipts and expenses. Where the whole business is transferred to another member of a 90% group, which is chargeable to corporation tax, FA12/SCH17/PARA13 provides that any transitional deemed receipts or expenses (see LAM14030) are treated as arising to the transferee over the remainder of the 10 year period in the same way as they would have applied to the transferor.

Where only part of the business is transferred within a 90% group PARA13(4) applies so that a proportion of the transitional deemed receipts or expenses is attributed to the transferee. That proportion is determined by the amount of receipts or expenses which can be fairly attributed to the business transferred at the time of the transfer.

The transitional provisions in FA12/SCH17/PARA14 address transfers between third party insurers and crystallise any remaining transitional amount. In that case the unexhausted transitional amount which is attributable to the whole, or part, of the transferred business is treated as arising to the transferor in the accounting period in which the transfer occurs. This means that only the transitional amounts relating to the transferred business will crystallise when paragraph 14 applies.