IPTM3925 - Policies and contracts owned by companies: application of the loan relationships rules: tax treated as paid: examples

The following examples assume a UK life policy that is an investment life insurance contract - see (IPTM3900) - forming part of the insurer’s BLAGAB business so the rules giving relief for tax treated as paid apply - see (IPTM3920).

Contract accounted for on historic cost basis

Company with normal accounting date 31 December took out a policy on 10 March 2014 with a premium of £10,000. It surrenders 25% of the policy on 5 February 2019 for £4,000.

There is a non-trading credit on the disposal: proceeds £4,000 less cost £2,500 (25% x £10,000) = £1,500. This must be grossed up by £1,500 x 20%/(100 – 20%) = £375 and a non-trading credit of £1,875 must be brought into account in the company’s CT computation for the AP to 31 December 2019. Tax treated as paid of £375 is available for set-off against the company’s liability to CT for this AP.

Contract accounted for on fair value basis

This example shows how tax treated as paid is calculated for a contract accounted for at fair value where there is a part surrender.

Company with accounting date 30 June takes out a policy on 15 July 2016 with premium of £20,000 and this is also the initial fair value (FV). The FV of the policy at 30 June 2017 is £22,000 and at 30 June 2018 it is £21,500.

The company surrenders 50% of the rights under the contract policy on 5 October 2018 for £12,000, and the FV immediately before the part surrender is £24,000. FV at 30 June 2019 of the rights under the contract retained by the company is £12,750.

AP ended 30 June 2017: There is a non-trading credit of £2,000 (£22,000 – £20,000, the increase in value of the policy over the AP). No tax is treated as paid as no related transactions have occurred during the year.

AP ended 30 June 2018: There is a non-trading debit of £500 (£21,500 – £22,000).

AP ended 30 June 2019: There is a non-trading credit on the part disposal on 5 October 2018 of £1,250 (before the increase for tax treated as paid), calculated as proceeds £12,000 less the proportion of the FV of the contract at the previous AP end-date relating to the part disposed of (50% x £21,500).

This is a related transaction so tax is treated as paid. C (the amount payable on the disposal) is £12,000 and FVC (the fair value immediately before the part surrender) is £24,000, so the proportion C/FVC is 50%.

PC is then £2,000, namely £12,000 less 50% x £20,000, which is the FV of the contract when it was made (which is after 1 July 2008, the start of the company’s first AP to begin on or after 1 April 2008).

The amount by which the non-trading credit is increased is then PC £2,000 x 20%/(100 – 20%) = £500, and this is also the amount of tax treated as paid. So, the non-trading credit relating to the part disposal is £1,250 + £500 = £1,750.

There is also an annual non-trading credit relating to the movement in value over the AP of the part of contract retained: FV at 30 June 2019 (£12,750) less 50% x FV at 30 June 2018 (£10,750) = £2,000.

In summary: There are non-trading credits totalling £3,750 (£1,750 + £2,000) for the AP ended 30 June 2019 and tax treated as paid of £500, which is available for set-off against the company’s liability to CT for that AP.