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HMRC internal manual

Lloyd's Manual

Names: taxation in earlier years: Reconstruction and Renewal

The Reconstruction and Renewal (R&R) settlement in 1996 gave rise to a number of taxation issues. These are mostly now settled. As part of R&R, Lloyd’s made a settlement offer to each Name. In return for giving up rights to litigation connected with membership of Lloyd’s, Names who accepted the offer were allocated settlement or ‘debt credits’ to be used to off-set outstanding liabilities to Lloyd’s, including the funding of the re-insurance premium due to Equitas.

Settlement credits and ‘Finality’ Statements

Settlement credits were taxed as trade receipts, as were refunds of litigation costs. The offer was accepted in 1996 so they were receipts of 1996, taxable 1996-97. Settlement credits paid later to Names who did not initially accept R&R were also taxable receipts, either of 1996-97 or of the year in which the Name settled with Lloyd’s depending on the exact terms of the offer.

The Settlement Offer was accompanied by a Finality Statement, detailing all the liabilities and credits brought together as part of the Offer. Interest on loans to fund R&R Finality Bills was also allowable as a trading deduction.

Re-insurance into Equitas

The cost of re-insuring open years into Equitas was reported to Names as an element of the Finality Bill. For some syndicates, the premium to re-insure into Equitas was less than the reserves. This allowed such syndicates to make an ‘Equitas release’. The Equitas premium or release was dealt with at syndicate level and accounted for in the account 1993 syndicate results and run off results to 31 December 1995. These results were taxable in 1993-94.

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Hardship and income support

In 1989, Lloyd’s introduced a scheme under which Names who were in financial difficulties as a result of their Lloyd’s losses could apply to the Lloyd’s Hardship Committee for assistance. Hardship payments were made from the central fund and to the extent that they were to meet losses and unpaid cash calls, the rules for taxing them were the same as apply to central fund draw downs - see LLM5170.

Some Hardship payments were not made to meet losses and unpaid cash calls. Depending on the nature of the agreement between the Name and Lloyd’s, such payments were taxed as annual payments (arising from membership of Lloyd’s), or treated as instalments of loans.

At the end of 1995, Hardship closed its door to new applicants as a result of the impending Reconstruction and Renewal Offer (R&R) which was entered into by the majority of Names in order to finalise their 1992 and prior underwriting losses. R&R became unconditional in 1996 when Lloyd’s then introduced the Income and Housing Support Schemes in order to assist Names who were in financial difficulties as a result of funding their R&R and Finality bills.

The Income Support Scheme (ISS) provided qualifying former Names with an income, paid quarterly and net of basic rate tax. ISS payments were taxed as annual payments. They did not arise from membership of Lloyd’s, were not Lloyd’s trading receipts, and Lloyd’s losses unused from earlier years could not be offset against this income.

In a few exceptional cases lump sum payments have been made to terminate the ISS payments. These are not annual payments and may be made without deduction of basic rate income tax. The sums received are, however, taxable as chargeable gains in the hands of the recipients, because they are capital sums derived from an asset (TCGA92/S22). The gain should be reported on the capital gains self assessment pages for the year ended 5 April in which the agreement was signed.

The Housing Support Scheme arranged for a mortgage to be provided on the house so that the guarantee could be released. Lloyd’s pay the interest on the mortgage and, in return, the Name agrees that the proceeds of their estate will be paid over to Lloyd’s up to the amount of the mortgage and accumulated interest. Payments under this scheme are instalments of a loan payable to the Name and are not taxable trading receipts. Equally, there is no deduction for tax purposes if any repayments are made to Lloyd’s in respect of the assistance given.