LAM01170 - Introduction and long-term insurance business overview: background to introduction of the FA12 life tax regime

The tax and regulation for life companies have been subject to major changes, with the current life tax regime effective from 1 January 2013 and the SII regime effective from 1 January 2016. Changes in tax, regulation and accounting can impact significantly on the mix and type of life products sold.

The new life tax regime is simpler than the previous regime, with less scope for the tax arbitrage which arose because of differences between the discretion afforded by the regulatory returns and the former mechanical tax rules.

The life tax legislation pre FA12 referenced the annual regulatory returns. The ‘surplus’ arising in those returns was the starting point for trading based calculations of taxable profits. Tax legislation included specific references to form numbers in a return that has now been superseded by the new SII regulatory returns, the Solvency and Financial Condition Report. The changes to the tax legislation were introduced in advance of the regulatory change to avoid a situation where the existing legislation would no longer function in the absence of the specified returns. At the same time the regime was simplified, removing some historical anomalies and aligning it to some extent more closely with the commercial position of the life companies and with the taxation basis of other types of companies.

The main conceptual changes introduced in FA12 were:

• trade profit for tax purposes is now based on accounting profit not regulatory surplus
• the I-E computation was simplified by limiting its scope solely to BLAGAB (and at the same time excluding post 2012 ‘new’ protection business from BLAGAB and taxing on a trading basis FA12/S62)
• apportionment bases required to split the investment income and profits between categories of insurance business are based on the underlying commercial position of the company. Previously there were rule based calculations based on a ratio of adjusted liabilities

The new regime was effective for accounting periods beginning on or after 1 January 2013 FA12/S148.

As a result of the change, transitional rules were required to ensure that profits and losses did not drop out of account or were taxed twice when moving from the regulatory surplus to the accounting profit.

The application of the transitional rules is summarised in LAM14000. The tax adjustments on transition have now largely been agreed. These adjustments, with a small number of exceptions, will feature in tax computations over a ten year period ending in 2022 and therefore explanations of these are important to an understanding of the tax computation.

The changes introduce some ongoing adjustments in addition to the transitional tax adjustments and split of protection business referred to above. For example, the treatment of acquisition expenses pre and post 1 January 2013. These have different tax and accounting definition and treatment pre 2013 but are aligned with accounts post 1 January 2013. This is explained further in LAM14000.