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HMRC internal manual

Lloyd's Manual

Names: other Lloyd’s-related income: stop loss recoveries

Where the aggregate of a Name’s syndicate results is a loss, a stop loss policy will pay over to the Name a certain portion of this, called a recovery. See LLM5180 for more details on stop loss policies, and LLM4150 concerning potentially confusing terminology in this area.

Stop loss recoveries are matched with declared losses

Unlike other non-syndicate income, personal stop loss (PSL) recoveries are in general matched with the respective losses that give rise to them (FA93/S178 (2)(a)) and included as income of the tax year in which the loss that triggered the recovery arose for tax purposes. For instance, a Name takes out a stop loss policy to cover the 2003 account. The Name’s aggregate syndicate results for that account are a loss. The stop loss policy meets that loss in 2007. This recovery in respect of that loss is Lloyd’s income of 2006-07 (even though the loss is not met until 2007), when the 2003 account loss arises for tax purposes. The amount to include is the full amount recoverable under the terms of the stop loss policy and not the amount actually paid over by the stop loss insurer.

The exception to this general rule is where a recovery becomes payable for the loss of an earlier account and for some reason (other than fraud or neglect), the Name could not include it in the self assessment for the year of loss. In these circumstances, the recovery is assessable in the tax year corresponding to the calendar year it was received (FA93/S178 (4)).

Stop loss repayments

If, following the recovery, the Name is compensated in some other way for the loss (for instance, by an award of damages), a stop loss policy requires the insured to pay back some or all of the recovery. Any repayments made directly to a stop loss insurer are treated in the same way as premiums; a deduction is allowed for the year of payment (FA93/S178 (1)(a)).

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Failed stop loss insurers

Should a PSL insurer be unable to meet in full claims under policies, any sum not recoverable is treated for tax purposes as a bad or doubtful debt (ICTA88/S74 (1)(j)). Once it can be established that the recovery is unlikely to be paid in full, the Name should make an estimate of the amount that is in doubt.

For example, a PSL insurer goes into liquidation. The liquidator issues a statement 10 April 2006 which shows that only 40% of claims are likely to be paid. The deduction that can be claimed will be 60% of the amount still to be paid out under the PSL policy. The deduction is given for the year in which it is established that the debt will not be paid in full, in this case 2006-07.

In common with bad debt relief for traders in general, the adjustment is made in the year the debt is established as doubtful, and not by adjusting the taxable profit or loss for the year the amount recoverable was taxed.

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Subsequent changes in value of expected recovery

If in a later year the amount the Name expects to recover from a PSL insurer decreases, a further claim to bad debt relief for the reduction can be made. Similarly, if the amount increases, or the Name receives more than the amount expected, the increase or the difference between the amount claimed as a bad debt relief and the amount received should be shown as an addition to profits in that year.