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HMRC internal manual

Lloyd's Manual

Names: other Lloyd’s-related expenditure: types of Estate Protection Plans

Since 1995, there have been two basic EPP policies. One option is a quota share reinsurance, the other is an unlimited stop loss policy with an excess. Annual premiums paid for either type of policy are allowable as deductions in the tax year which corresponds to the calendar year of payment, for example, a premium paid in December 2005 for an EPP to cover death in 2006 is allowable 2005-06.

If the policy provides that the Name’s estate has to pay the first part of any losses, and that any excess of profits over losses is refunded to the estate, then this is treated as a stop loss policy. If the policy does not have these conditions, then for tax purposes it may be a quota share policy within FA93/S178 (1)(c).

Stop loss option

EPP stop loss policies are taxed in the same way as other stop loss policies. The policy meets losses and cash calls made after the date of death. Premiums payable in respect of unlimited stop loss policies are allowable and recoveries payable are taxable in accordance with the provisions of FA93/S178.

For example a Name pays an EPP stop loss premium of £315 on a 2004 nil excess policy in June 2004 and dies in March 2005. Relief is correctly claimed for the premium in 2004-05.

In June 2006, the 2003 underwriting account declares a loss of £75,000 of which £50,000 is called in July 2006. Centrewrite pays this amount in July 2006 - this is a recovery by the estate under the policy. The balance of £25,000 is not called until July 2007, when Centrewrite again settles the claim.

Both payments by Centrewrite are taxable receipts of the trade that arise in the same tax year as the losses which triggered them (FA93/S178 (2)(b)). When the executors complete the Lloyd’s Trust and Estate Pages for 2006-07, a stop loss recovery of £75,000 should be included as a taxable receipt.

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Quota share option.

Under the quota share option, Centrewrite Ltd steps into the shoes of the deceased and, with effect from the operative date, assumes responsibility for settling losses, and receives and retains all profit distributions. The policy enables the Lloyd’s Deposit and SRF to be released shortly after death, and the administration period of the estate is reduced accordingly. Executors of members who died in 1997 and later years retain the right to refunds of the members’ special contributions (LLM5170). The Name (or rather, his personal representatives) will be treated as having left Lloyd’s. If the policy pays out losses or cash calls, for contracts entered into before 17 April 2002, these payments will not give rise to taxable receipts of the estate. See LLM5210.

The EPP quota share arrangements are governed by the normal tax provisions for this type of policy, so that premiums are deductible under FA93/S178 (1)(c). The premium paid by the Name is allowed as a deduction for the tax year corresponding to the calendar year of payment (LLM5180).

Under the quota share option, the Lloyd’s Deposit will normally be released fairly shortly after death, and this leads to a cessation for tax purposes (FA93/S179). The rules outlined in SI1995/353 apply on cessation, so that, for example, if the Name does not have a Lloyd’s Deposit to release, then entering a quota share policy can also trigger cessation for tax purposes (regulation 9(7) of SI1995/353).