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HMRC internal manual

Lloyd's Manual

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HM Revenue & Customs
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Names: Special Reserve Funds: taxation on cessation

When the balance of the SRF is paid out to a Name on cessation of underwriting, the full amount of the withdrawal is treated as trading income of the Name and is attributed to the final tax year of the underwriting business (FA93/SCH20/PARA11), unless the Name has died. Where the Name has died, the transfer is a trading receipt of the final year for which underwriting profits are assessable on the Name personally (tax year ending in the calendar year of death - FA93/S179A (2)).

There can be a gap of several years between the final year in which profits are assessable on the Name personally, and the year in which the funds in the SRF are finally released. This could therefore lead to a significant interest charge on the tax due on the SRF release.

To avoid this interest charge, SI1999/3308 amended FA93/SCH20/PARA11, with effect from 2000-2001. Where the Name has died, the transfer is still a trading receipt of the final year in which underwriting profits are assessable on the Name personally. However, for interest purposes only, the payment is treated as if made immediately after the commencement of the deceased member’s final tax year. This final year is given by FA93/S179 (2), and is generally the year in which the deposit is released LLM5320. This change brought the estates of deceased members in line with other members as far as the interest charge is concerned.

Taxable amount: 2000-2001 onwards

The starting point is the valuation of the fund on 31 December preceding the release. This valuation will have been carried out for annual valuation purposes.

Then add any of the following items which arise after the 31 December

  • sums paid into the SRF out of profits (regulation 6, paragraph 4(a))
  • investment income arising in the fund (regulation 6, paragraph 4(c))
  • profits on the sale of assets within the fund (regulation 6, paragraph 4(c))
  • tax repayment made into the SRF (Schedule 20, paragraph 11 (3)(c))
  • excess cash call repaid to the SRF (Schedule 20, paragraph 11(3)(b))
  • stop loss payment paid into the SRF (Schedule 20, paragraph 11(3)(b).

Also add any sums paid over to the member or their estate before 31 December, apart from any payments made following the previous annual valuation, which are charged to tax under FA93/SCH20/PARA6 (regulation 6, paragraph 4(e)).

Then subtract any of the following items which arise after the 31st December

  • payments out to meet losses or cash calls (Schedule 20, paragraph 11 (3)(a))
  • payments out following repayments of stop loss payments to the member (Schedule 20, paragraph 11 (3)(a))
  • losses on the sale of assets within the fund (regulation 6, paragraph 4(c)).

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Transfer of SRF assets to Name on cessation

On cessation the amount held in the SRF is paid over to the Name or the personal representative as directed (FA93/SCH20/PARA7 (2)). If the fund consists of non-cash assets the Name or personal representative can direct that the assets themselves are released (unlike other circumstances of withdrawal, when assets are not released by the trustees of the fund).

For capital gains purposes, the assets are deemed to be acquired by the Name or personal representative on the last annual valuation date, for a consideration equal to their market value at that date (FA93/SCH20/PARA11 (4)), provided that the assets were held in the SRF at that date, and continuously until the date of the transfer.

If the assets are released before the final valuation date, the Name is treated as acquiring the assets on the date of transfer and for the market value at that time (regulation 6(5), SI1999/3308). The value of the assets at the date of transfer is added to the charge on cessation.

If the assets are acquired after the final 31 December valuation, and then transferred to the Name, the Name is treated as acquiring the transferred assets on the date at which the trustees of the fund acquired the assets, and for the consideration paid by the trustees.

See also LLM8180.