Policy paper

Explanatory Note

Updated 25 January 2024

Clause 1: Re-insurance in the course of transfer of BLAGAB

Summary

(1) This clause applies to re-insurers of a specific type of long-term insurance business known as basic life assurance and general annuity business (BLAGAB). It addresses a tax mismatch in the life insurance rules where re-insurance precedes a transfer of BLAGAB. In this situation the clause classifies the re-insured business as BLAGAB in the hands of the re-insurer.

Details of the clause

(2) Subsection (1) introduces new section 130A into Part 2 of Finance Act 2012.

(3) Subsection (1) of new section 130A sets the scope of the provision. It applies to insurance companies that re-insure business that is BLAGAB in the hands of the ceding insurer and where there is an intention to permanently transfer that business to the re-insurer, or a connected person, in the future.

(4) Subsection (2) of new section 130A extends that scope where the re-insurance is initially not undertaken with a view to a transfer of business, but that intention changes at a later time.

(5) Subsection (3) of new section 130A deems the re-insured business to be BLAGAB in the hands of the re-insurer.

(6) Subsection (4) of new section 130A confirms that the trading profit or loss arising to the re-insurer from the re-insured BLAGAB is to be allocated to BLAGAB.

(7) Subsection (5) of new section 130A excludes amounts arising from the re-insured BLAGAB from the I minus E calculation of the re-insurer except for amounts falling within subsection 130A(6).

(8) Subsection (6) of new section 130A ensures that where a BLAGAB trade loss is relieved by the re-insurer, BLAGAB management expenses are reduced by an equivalent amount.

(9) Subsection (7) of new section 130A confirms that the ceding insurer is not affected by this clause.

(10) Subsection (8) of new section 130A explains the meaning of ‘arrangements’.

(11) Subsection (9) of new section 130A defines what is meant by ‘connected persons’.

(12) Subsection (2) brings the clause into effect from 15 December 2022 and applies it to re-insurance contracts whenever they were entered into.

(13) Subsection (3) applies the clause additionally to the whole of any accounting period beginning before 15 December 2022 for which the reporting standard IFRS 17 is adopted, where the decision to adopt IFRS 17 is taken on or after the 15 December 2022.

(14) Subsection (4) defines what is meant by ‘IFRS 17’.

Background note

(15) When books of life insurance policies are transferred between insurers, the economic transfer is typically effected by a re-insurance contract, pending court approval of the transfer. This gives the purchaser the economic benefits of the acquisition immediately.

(16) A tax mismatch can arise as the profits from the business are initially taxed in the hands of the cedant as BLAGAB, then in the reinsurer as non-BLAGAB and finally in the reinsurer, after the business transfer scheme occurs, as BLAGAB once again. A loss of tax can occur if a non-BLAGAB trade loss arises in the reinsurer and is offset against total profits or surrendered as group relief.

(17) This clause resolves this anomaly by ensuring that any profits or losses from the re-insured business, which arise to the re-insurer, are within BLAGAB. The result is that any trade profit or loss in the re-insurer will be subject to the BLAGAB rules, bringing the tax treatment of the reinsurer into line with the seller of the business.

Clause 2: Certain re-insurance sums not to count as deemed I-E receipts

Summary

(1) This clause amends section 92 of Finance Act 2012 and restricts its scope where substantially all the insurance risks of a book of basic life assurance and general annuity business (BLAGAB) are assumed by a re-insurer.  In such a case, any amounts received under the re-insurance can no longer count as deemed receipts within the life tax calculation (known as the I-E basis).

Details of the clause

(2) Subsection (1) introduces an amendment to section 92 Finance Act 2012.

(3) Subsections (2) and (3) amend section 92(5) and 92(6) Finance Act 2012 so that, where substantially all insurance risks within a group of BLAGAB policies are re-insured, any amounts paid under the contract cannot be deemed to be income for the purposes of the I-E rules which apply to life insurance companies.

(4) Subsection (4) brings the clause into effect for accounting periods ending on or after the 15 December 2022.

Background note

(5) This amendment to existing legislation addresses industry concern that the current scope of section 92 Finance Act 2012 may be unnecessarily wide. Where life insurance companies re-insure blocks of BLAGAB, it is possible that amounts received under the re-insurance might be treated as deemed income within I-E. This uncertainty has inhibited commercial transactions.

(6) The amendment excludes amounts from the operation of section 92 Finance Act 2012 where sums are paid under a re-insurance contract and substantially all the insurance risks relating to a group of policies are re-insured.