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HMRC internal manual

Lloyd's Manual

Names: other Lloyd’s-related expenditure: stop loss and quota share insurance

Stop loss policies

Stop loss is a type of insurance which provides cover if a Name make a loss of more than a specified amount in an underwriting year. When the aggregate of the Name’s syndicate results is a loss, a stop loss policy will pay over to the Name a certain portion of that loss, called a recovery.

Quota share contacts

A quota share contract (for example, the ‘Exeat’ policy offered by Centrewrite) is a contract under which a Name makes arrangements for another person to take over some or all of their rights or liabilities for any syndicate of which they are a member. Names can enter into quota share arrangements for part of their underwriting (usually arranged at syndicate level, in respect of one or more syndicates) or can use them as a means to end involvement with Lloyd’s.

Loans for quota share payments

Names may take out loans to pay for quota share arrangements. These loans are to meet expenses which in some circumstances allow Names to cease as underwriting members of Lloyd’s. Such expenses are generally allowable trading deductions (FA93/S178) even where the purpose of entering into the arrangement is to leave Lloyd’s.

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Premiums paid for these policies are allowed as deductions (FA93/S178 (1)(a)) in the tax year corresponding to the calendar year in which they are paid, regardless of the account or accounts covered by the policy for which the premium is paid (FA93/S172 (1)(c)). Premiums payable by private Names are thus treated as deductible in computing ‘other profits or losses’, because they protect the investor’s personal trade position, rather than profits or losses arising directly from syndicate membership within FA93/S172 (1)(a). For example, a quota share payment made in December 2004 for a quota share arrangement for the 2005 account is allowable as a deduction against 2004-05. Premiums for ‘quota share policies’ are allowable even though the payment can be seen as a payment to end trading, rather than a payment for the purposes of carrying on the trade.

Large premiums payable under a stop loss insurance policy may present a tax risk. Premiums are only deductible in full if they are genuinely paid away by the Name for stop loss insurance, and not if they are used to build up a capital fund or to obtain some other benefit of a long term nature.

Stop loss recoveries are included in the Lloyd’s taxable results in the year the loss arises for tax purposes see LLM5130.

An Estate Protection Plan (EPP) (LLM5190) can take the form of either a quota share or a stop loss policy.