LAM05050 - Apportionment rules: Allocation of BLAGAB income and gains: direct or factual allocation
Factual allocation is used where income and gains are directly attributed to particular lines of business. Where this is the case the same direct allocation should be followed for tax purposes and for trade profit allocation.
The main categories where this applies will be assets either matched or ring-fenced/allocated by the company to BLAGAB.
Assets wholly or partly matched to BLAGAB: FA12/S100
FA12/S100 refers to allocation of chargeable gains and allowable losses where assets are wholly or partly matched to BLAGAB. Where specific assets or pools of assets are matched or partly matched to particular types of BLAGAB policy, the allocation of those assets (and related income, gains etc.) to BLAGAB should follow that attribution.
‘Assets matched to liabilities’ is defined in FA12/S138. An asset is matched to a liability if, in accordance with the ‘applicable method’ (broadly the commercial allocation), some or all of the income or other return arising from that particular asset is specifically referable to that category of business.
To be ‘specifically referable’ the allocation of the income or other return is a consequence of a contractual requirement imposed on the company relating to the category of business- FA12/S138(8).
FA12/S100 also refers to assets partly matched to BLAGAB liabilities where the ‘appropriate proportion’ of any gain or loss is allocated to BLAGAB (LAM03210).
Although S100 relates to chargeable gains and allowable losses, there is a requirement for consistency between the methods for income and gains at S101(5). This does not mean that there is the same allocation of chargeable gains arising on the disposal of an asset and income and credits arising from the same asset in every case. However, we would expect in most cases that the same approach should be adopted when allocating income and credits arising on assets that fall within S100. This would also be consistent with how income and credits are allocated commercially for unit-linked polices.
Assets not matched to BLAGAB: Internal ring-fencing/allocation: FA12/S101
Where specific assets or pools of assets are linked or otherwise directly attributable to particular types of policy, the allocation of those assets (and related income, gains etc.) between BLAGAB and other long-term business for tax purposes should follow that attribution.
Assets may not be formally linked but the company’s internal management and accounting systems may allocate or ring-fence particular assets, and therefore the income and gains arising, to cover liabilities on particular policies or categories of polices. The commercial allocation should fairly represent the contribution the assets have to the business for tax purposes, in most cases it would be expected to follow the internal allocation of assets.
For example, a separate pool of assets may be held to support liabilities related to particular blocks of policies, such as annuity business, or assets held to support the cost of guarantees on specific policies.
The company’s regulatory returns are likely to tell you more about the structure of the company and this should be reflected in the company’s commercial allocation method.
Example of S100 and S101
For a proprietary life company only writing business that is unit-linked and annuity business where assets are ring-fenced to that business, the commercial allocation of income might look like this:
| Pools of assets | Liabilities (£’m) | Taxable | Nature of assets |
|---|---|---|---|
| Unit-linked BLAGAB | 400 | 7 | Equities and bonds |
| Unit-linked Pension (non-BLAGAB) | 600 | 10 | Mainly equities |
| Non- BLAGAB pension annuity business | 500 | 50 | Backed by bonds so higher proportion of taxable income |
| Other long-term business assets (BLAGAB and non-BLAGAB) | 200 | 10 | Mean liabilities BLAGAB 25\nNon-BLAGAB 75 |
- dividends are not taxable income under I-E.
- the unit-linked BLAGAB taxable income of £7m is all factually allocated loan relationship income and is taxed in the I-E computation LAM03000.
- pension annuity business is non-BLAGAB and so there is no income to allocate to BLAGAB. It will therefore only be included in the trade profit computation and will not be included in the I-E.
- for the other long-term business the company has determined that mean liabilities is an appropriate commercial allocation method. The £200m liabilities relate to a mix of BLAGAB and non-BLAGAB and are apportioned on a mean liability basis such that £2.5m is allocated to the I-E computation.
- total BLAGAB income in the I-E will therefore be the £2.5m plus the £7m to give £9.5m in total.