LAM14040 - Finance Act 2012 Transitional provisions: BLAGAB consisting wholly of protection business: FA12/SCH17/PART2/PARA21

Background

The pre-FA12 regime treated protection business as BLAGAB. As a result, tax was based on investment income plus gains less expenses rather than on trading profit.

However, protection business is not a savings product, so applying the ‘I-E’ concept of taxing the policyholder investment return was not consistent with the objective of the regime. This treatment could create significant distortions in the tax charge. The expenses relating to these products were fully deductible in the I-E computation although the offsetting premium income was not. Some of these protection products, such as mortgage protection and payment protection products paid high commissions to intermediaries and generated significant tax deductions for expenses but relatively small amounts of investment income.

At the same time as the introduction of the new life tax regime, the treatment of protection business was changed from BLAGAB to non-BLAGAB. This aligns it more closely with the taxation of other wholly risk based insurance products, such as general insurance policies, taxable on a normal trading basis.

Protection business is defined in FA12/S62 and is intended to include pure life insurance which pays out on death or incapacity. There are a number of conditions to the definition but the main element relates to contracts where:

“the benefits payable cannot exceed the amount of premiums paid except on death, or in respect of incapacity due to injury, sickness or other infirmity, and the contract is made on or after 1 January 2013”

In assessing the benefits test, the following are to be ignored:

  • non-cash inducements (such as small gifts) to enter into the contract;
  • excesses which are an insignificant proportion (although there is no guidance as to the threshold of insignificance); and
  • amounts only payable in highly unlikely circumstances

The new regime introduced in FA12 treats protection business written from 1 January 2013 as non-BLAGAB business.

Transitional provisions

The transitional provisions in FA12/SCH17/PARA21 provide for an irrevocable election to treat ‘old’ BLAGAB protection business as non-BLAGAB under the new rules. This election can be made:

  • where the insurance company only writes protection business and
  • the election is made on or before the filing date for the first accounting period where the new regime applies (for most insurers with December year ends, by 31 December 2014)

This is a simplification measure. A company with ‘old’ protection business and expenses still to deduct will never obtain any effective tax relief if there is no savings business with ‘I’ (LAM03000) to offset the ‘E’ (LAM04000). Accordingly, there is no benefit in maintaining two sets of computations for ‘old’ and ‘new’ business.

This election therefore will already have been made if it is relevant and it is too late for any further elections to be made. Computations for companies that were in existence prior to 1 January 2013 and only writing protection business should have one combined non-BLAGAB computation if they have made the relevant election. Where such an election is made, paragraph 21(3) ensures that no relief will be available for excess BLAGAB management expenses carried forward into the 2013 regime. Other companies with protection business pre and post 1 January 2013, who have not elected, will have to separate the income and expenses for protection business before and after this date as part of the tax computation.