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HMRC internal manual

Lloyd's Manual

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HM Revenue & Customs
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Corporate members: taxation of premium trust fund (PTF) income and gains

A corporate member is treated as absolutely entitled as against the trustees to the assets which form part of a premium trust fund (PTF) belonging to the member. Investment income and gains arise on these assets, and this income forms part of the income arising directly from syndicate membership. In practice, the PTF assets relating to three or more syndicate years are managed jointly, so a formula is needed to separate out the income and gains arising on this pool of assets, and allocate them to syndicate years. The method generally used is known as the Riesco formula - see LLM2210.

FA94/S220 (2)(b)(i) provides for the allocation of PTF profits or losses, according to the rules or practice of Lloyd’s, which means that the Riesco formula can be used in arriving at the taxable result. The Riesco formula is applied by the managing agent at the level of the syndicate. Income and gains allocated in this way are included in syndicate financial results, which are then incorporated into the results of the member and taxed on the declaration basis - see LLM4100.

Aligned members (see LLM1090) may in addition have profits or losses arise on ‘member capital’ held in the PTF, which by virtue of FA94/S220 (2)(b)(ii) is subject to the normal corporation tax arising basis - see LLM4105.

Foreign currency assets, derivative contracts, loan relationships and the PTF

When the tax rules for corporate members were introduced in FA 1994, sections 226(1) to 226(3) disapplied the currency accounting, forex and financial instruments rules that normally apply to companies, in respect of assets, liabilities, contracts, etc., forming part of a corporate member’s PTF. This was to avoid the complexities that would ensue if a managing agent had to account differently for such items in relation to individual and corporate members. These rules have changed a number of times since FA94 was enacted. The position is now as follows

  • FA96/SCH11/PARA7 disapplies the loan relationships rules in relation to a corporate member’s PTF.
  • FA94/S226 (1) disapplied FA93/S92 to FA93/S95 (as they then were) which permitted the computation of corporation tax profits other than in sterling. The rules were amended by FA00, but the Lloyd’s exemption was retained. The rules were amended again by FA02 with effect for accounting periods beginning on or after 1 October 2002, in essence requiring tax computations to follow the foreign currency. FA94/S226 (1) was repealed with effect from accounting periods beginning on or after 1 October 2002. The currency accounting rules were amended again by FA04, with effect from accounting periods beginning on or after 1 January 2005.
  • FA94/S226 (2) disapplied the FA93 forex rules. With effect for accounting periods beginning on or after 1 October 2002 these rules were subsumed within the loan relationships legislation and FA94/S226 (2) was repealed.
  • FA94/S226 (3) disapplied the financial instruments rules in FA94. With effect from accounting periods beginning on or after 1 October 2002, these rules were replaced by the derivative contracts legislation in FA02/SCH26 and FA94/S226 (3) now disapplies that legislation.

The Corporate Finance Manual (LLM10000) gives more details of the tax treatment of loan relationships, foreign currency and exchange, and derivatives. The General Insurance Manual (GIM5000+) (LLM10000) gives details of the application of this legislation to general insurance companies.