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HMRC internal manual

Life Assurance Manual

Excess expenses, losses and deficits

This manual has yet to be updated for the interest restriction and changes to relief for carried forward losses introduced by Finance (No.2) Act 2017.

This chapter summarises the relevant rules applicable to the offset of losses and other reliefs against the different sources of profit in a life insurance company.

These rules are also referred to in more detail in other relevant chapters.

The table below lists the main sources of losses and reliefs. The crosses indicate where these may be relevant in the computations of the various elements of the life company tax charge.

Loss/Relief type BLAGAB I-E profit BLAGAB trade profit Non-BLAGAB long term business trade profit LTBFC / other non-trading profits General insurance trade profit
Management expenses X     X  
Trade losses   X X   X
Capital losses X     X  
Allowable  losses on deemed disposals TCGA92/S212 X        
Non-trading loan relationship / derivative deficits ‘NTLRD’ X     X  
NTD –intangible assets X     X  
UK property business loss X     X  
Capital allowances – investment assets X        
Capital allowances – management assets X X X X X
Group relief claims S/H share   X X X

LTBFC is Long Term Business Fixed Capital LAM11000

Significant changes to the loss relief rules were made with effect from 1 April 2017 by F2A2017. Where an accounting period straddles 1 April 2017, for the purpose of applying the loss relief rules it an accounting period is treated as ending on 31 March 2017, with a new one beginning on 1 April 2017.

A summary of the specific rules where offsetting is possible is below. The summary explains where these vary from the normal rules for offset. The summary will be updated to reflect the impact of the loss restriction rules introduced by F(No.2) A 2017 CTA10/Part 5A.

The summary as a diagram.

Management Expenses – a brief summary

BLAGAB I-E management expenses LAM04000

Adjusted BLAGAB management expenses are set against I-E income and net chargeable gains of the period. Excess expenses can only be carried forward and treated as BLAGAB expenses of the next period.

LTBF and other non-trading business management expenses summary LAM11000

Exceptionally the general rule at CTA09/S1219 could apply to expenses from the management of grandfathered assets in LTBFC or other non-trading activity. Expenses are set against income from the non-trading business in the period.

Excess expenses can be:

  • set off against total profits of the period (excluding BLAGAB policyholder share of I-E profits);
  • surrendered as group relief;
  • carried forward and set against LTBFC/non-trading income of the next period

Trade Losses – a brief summary

BLAGAB trade losses

A BLAGAB trade loss (LAM07310) of the period can be:

  1. set sideways against shareholder total profits of the period;
  2. set against shareholder total profits for the previous 12 months;
  3. surrendered as group relief;
  4. carried forward and set against any BLAGAB trade profit of the next period

Shareholder total profits include:

  • the shareholders’ share of the I-E profit (but where there is a BLAGAB trade loss there will be no shareholders’ share of the I-E profit);
  • non-BLAGAB trade profit;
  • profits arising from LTBFC;
  • trade profits from any short-term business

A BLAGAB trade loss utilised under any of options 1 to 3 above requires two adjustments to be made:

  • firstly the loss must be reduced by any BLAGAB non-trading deficit FA12/S126, then
  • the BLAGAB management expenses of the period must be reduced (at step 4 of FA12/S76) by the quantum of loss utilised

Non-BLAGAB trade losses

Non-BLAGAB trade losses (LAM07300) are treated as “normal” trade losses and can be:

  • set against shareholder total profits of the period, any remaining losses after set off in the period of loss can be set against shareholder total profits of the previous 12 months;
  • surrendered as group relief;
  • carried forward and set against future non-BLAGAB trade profits

Shareholder total profits include:

  • the shareholders’ share of the I-E profit;
  • non-BLAGAB trade profit;
  • profit arising from long-term business fixed capital;
  • trade profit from any short-term business

Short term business e.g. general insurance trade losses

Losses from any short-term business such as general insurance are treated as ‘normal’ trade losses and can be:

  • set against shareholder total profits of the period, any remaining loss can be set against shareholder total profits of the previous 12 months;
  • surrendered as group relief;
  • carried forward and set against future profits of the short-term trade

Shareholder total profits include:

  • the shareholders’ share of the I - E profit (LAM06000);
  • non-BLAGAB trade profit;
  • profit arising from long-term business fixed capital;
  • trade profit from any short-term business

Capital Losses – a brief summary

BLAGAB capital losses

BLAGAB capital losses (LAM03200) can be utilised as follows:

  • set against BLAGAB chargeable gains of the period (including deemed gains LAM03300);
  • carried forward and set against BLAGAB chargeable gains of the next period;
  • the shareholders’ share of the net BLAGAB allowable loss can be set against non-BLAGAB gains (LAM03420);

A net allowable loss arising from a deemed disposal under TCGA92/S212 (LAM03340) can be carried back (in full or in part) and set against net chargeable gains arising from the deemed disposal in the previous two accounting periods.

Any net allowable loss remaining is spread over 7 years. 1/7th of the net allowable loss is treated as an allowable loss of the accounting period with a further 1/7th treated as an allowable loss at the end of each succeeding accounting period.

LTBFC and other non-trading business capital losses

Capital losses not arising from BLAGAB will be set off against any capital gains not arising from BLAGAB.  Any excess losses can be:

  • set off against the shareholder’s share of BLAGAB gains (LAM03400);
  • carried forward to the next period and set against chargeable gains not arising from BLAGAB in future periods;
  • carried forward to the next period and set against the shareholders’ share of any BLAGAB gains in future periods

Non-trading loan relationship deficit (loan relationships and derivatives) - a brief summary

BLAGAB non-trading loan relationship deficit (loan relationships and derivatives)

Any BLAGAB NTLR deficit (LAM03060) is to be used firstly against BLAGAB income and gains of the period. Any remaining deficit can be carried back for up to 3 accounting periods ending within the 12 months immediately before the deficit period.

Any deficit still remaining is carried forward to the next period and treated as a deemed BLAGAB management expenses of that period.

LTBFC and other non-trading business non-trading loan relationship deficits (loan relationships and derivatives)

A non-trade loan relationship (NTLR) deficit arising in LTBFC is treated as a ‘normal’ non-trading deficit under CTA09/S456. The deficit can be:

  • set against shareholder total profits of the period;
  • carried back (in full or in part) and set against any NTLR profit (other than BLAGAB NTLR profit) of the previous 12 months;
  • surrendered as group relief;
  • carried forward and set against non-trading profits for future accounting periods

Non-trading deficit (intangible assets) – a brief summary

BLAGAB non-trading deficit (intangible assets)

Any non-trading deficit (LAM03070) arising from an intangible asset is treated as a deemed management expenses of the period.

LTBFC and other non-trading business non-trading deficit (intangible assets)

Any non-trading deficit arising in LTBFC is treated as a “normal” non-trading deficit under CTA09/S456. The deficit can be:

  • set against shareholder total profits of the period;
  • carried back (in full or in part) and set against any non-trading profits of the previous 12 months;
  • surrendered as group relief;
  • carried forward and set against non-trading profits for future accounting periods CTA09/S457

UK property business loss – a brief summary

BLAGAB UK property business loss

An overall net loss arising from BLAGAB property businesses (LAM03090) is treated as a deemed management expense of the period.

LTBFC and other non-trading property business loss

Any property income loss arising from property assets in LTBFC is set off under the rules in CTA10/S62 PIM4230

Capital allowances – a brief summary LAM07150

Capital Allowances – investment assets

Investment capital allowances can be deducted in the BLAGAB I-E computation. CAA01/S545(3) denies relief for investment capital allowances in non-BLAGAB.

Capital Allowances – management assets

  Deductibility
BLAGAB I-E Management capital allowances are brought into account at step 3 FA12/S76
BLAGAB trade Management capital allowances can be deducted in the BLAGAB trade computation
Non-BLAGAB trade Management capital allowances can be deducted in the non-BLAGAB trade computation
LTBFC and other non-trading business CAA01/S18 and CAA01/S253 allow capital allowances on plant & machinery used in managing the investment business
Short-term business (e.g. general insurance) The normal capital allowances rules apply to general insurance business. See GIM4090 and CTM02350

Group relief – a brief summary

The summary above sets out how excess expenses, losses and deficits can be utilised within a life insurance company. Subject to specific rules on the order of set off excess expenses, losses and deficits can also be surrendered to other group companies by way of group relief, with the exception of excess expenses, or XSE, and LR deficits in the I-E computation. However, BLAGAB trade losses can be surrendered by way of group relief despite BLAGAB trade profits themselves not being subject to Corporation Tax.

Life insurance companies can also claim group relief surrendered by group companies against their total profits, subject to the exception which prohibits group relief being set off against I-E profit taxed at the policyholder rate.

The shareholders’ share of the I-E profit can be relieved by group relief surrender by other group companies.

The shareholders’ share of amounts falling within CTA10/S99(d)-(g) are only available for surrender to the extent they exceed the surrendering company’s gross profits of the surrender period excluding the policyholders’ share of the I-E profit – CTA10/S105 and FA12/S125(3).

The normal group relief rules apply to a claim to set group relief against a non-BLAGAB trade profit, any profits arising in LTBFC or any short-term business profit.