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HMRC internal manual

Lloyd's Manual

Equalisation reserves for corporate and partnership members: background

Equalisation reserves are amounts set aside against the fluctuating results that can arise in certain volatile classes of general insurance business, for example property protection against storm and flood.

GIM7010 explains the background to the introduction of regulatory equalisation reserve rules and related tax relief rules (ICTA88/S444BA and SI1996/2991). The relief was dependent upon the regulatory requirement that the reserves be made. The Society of Lloyd’s and its members are regulated somewhat differently from other insurers regulated by the PRA, and it was never a requirement that equalisation reserves were made by Lloyd’s members.

FA09/S47 and The Lloyd’s Underwriters (Equalisation Reserves) (Tax) Regulations 2009 (SI2009/2039) provided relief where a corporate or partnership member of Lloyd’s established an ‘equivalent Lloyd’s reserve’, that is, on lines equivalent to an equalisation reserve that would have been required to be made by a general insurance company pursuing similar business.

The legislation applied to accounting periods ending on or after 31 December 2008. However, following the introduction of Solvency II from 1 January 2016, regulatory equalisation reserves are no longer required. To reflect this, the consequent tax rules for general insurance companies and Lloyd’s company and partnership members were repealed for accounting periods ending on or after this date. Amounts accumulated in equalisation reserves, or an equivalent Lloyd’s reserve, are to be released in 6 equal instalments under transitional rules (unless an election is made to release in a single period). Further detail can be found at LLM3470 and GIM7400-7500.