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HMRC internal manual

Lloyd's Manual

Names: income from ancillary trust funds (‘ATFs’): other types of security

Relevant discounted securities (RDS)

These are securities where the investor’s return is mainly made up of a discount or premium payable on redemption, rather than by interest payable over the life of the bond. Any loss on disposal of a relevant discounted security that is held in an ATF is allowable as a deduction from Lloyd’s trade profits, and can create or augment Lloyd’s trading losses which attract the same treatment as any other trading losses. This differs from the treatment of losses on disposals of RDS which are part of a Name’s personal portfolio - these losses can only be set against other income of the year of loss.

Non residents and FOTRA securities

There is no exemption from tax on the interest arising on FOTRA (free of tax to residents abroad) gilts that are held as part of a non-resident Name’s personal Funds at Lloyd’s. This is because the income arising on gilts held as part of an ATF is included in trading results.

Gains on life assurance policies, life annuities and capital redemption policies

These types of policies may be held as part of a Name’s Funds at Lloyd’s but the tax treatment of any gain on these policies depends on how the policy is used to back the underwriting. If the life company has provided a guarantee to Lloyd’s secured on the life policy, the gains do not form part of the Name’s Lloyd’s trading income, and are taxable under the chargeable event regime (that is, they are included as part of the taxpayer’s total income and, if UK policies, are treated as having borne tax at lower rate, with top slicing relief available if the gain takes the taxpayer into higher rate tax for that year).

If, however, the Trust Deed governing the Lloyd’s Deposit includes the policy itself, the profits on the policy are included in the Lloyd’s trade income. Because the gains are included in trading profits, the chargeable event regime does not apply. Gains are computed on accountancy principles, UK policy gains are not regarded as having suffered tax at the lower rate, and neither is top slicing relief available.

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Building society mergers and take-overs

If the Funds at Lloyd’s are held in a building society that is involved in a merger or a take-over by a limited company, the Name, or Lloyd’s as trustees, may receive cash and/or shares. To the extent that cash payments relate to deposits held as part of Funds at Lloyd’s, those payments which are liable to income tax should be included in the Name’s ATF income for the tax year corresponding to the calendar year in which the payment is received.

Cash payments liable to income tax are generally those received following a building society merger. Cash payments received following the take-over of a building society, or conversion of a building society into a limited company are generally liable to capital gains tax.