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HMRC internal manual

Lloyd's Manual

Conversion: collective conversion schemes: introduction

A number of different schemes have been used under which groups of Names have transferred syndicate capacity to a company which is a corporate member of Lloyd’s. Such schemes require the Name to make their Funds at Lloyd’s (FAL) interavailable to the company. In consideration of the transfer of capacity and the interavailable FAL, the company issues shares and/or loan stock to the Name.

Some schemes have required the converting Name to pay up a certain part, or certain classes of share, or certain categories of loan stock only if the conversion vehicle incurs losses. Capital gains tax issues arise in such cases and are dealt with at LLM6040. Each scheme is different and the tax treatment will depend on the facts of each case.

The conversion vehicle in such cases is the underwriting member of Lloyd’s and is taxable according to the normal rules in FA94 that apply to corporate members (LLM4000+). The converting Name is a participator (a shareholder or loan creditor) of the conversion vehicle and is not an underwriting member by virtue of their interest in the company. The converting Name may of course quite separately continue to be an underwriting member for run-off or new years of account.

Where the conversion vehicle makes profits and distributes those to the converting Name, the income is taxable according to the terms of the agreement. That is, depending on the facts of the case, it may be taxable as a dividend, as interest, or as “income not otherwise charged” - the former Case VI of Schedule D. It will not be taxable under the rules in FA93 (LLM5000+), nor will it be taxable as income from a separate trade.

Where the conversion vehicle makes losses, the Name may be required to pay up amounts in respect of the shares and loan stock received, in order to cover the company’s underwriting losses. Any amounts paid for the shares or securities may now be irrecoverable or have become of negligible value. In such cases the participator may have incurred a capital loss based on the difference between the value of the investment on conversion and the date on which negligible value was agreed by Shares and Assets Valuation. LLM6040 explains the capital gains tax issues in such cases.