LAM05100 - Apportionment rules: Allocation of BLAGAB gains: Specific consideration for allocation of gains under: FA12/S101

Chargeable gains not covered (or not wholly covered) by S100 (matched assets, for example, unit-linked), fall within FA12/S101. This requires that on disposal of a chargeable asset that is not wholly or partly ‘matched’ the BLAGAB-element of chargeable gains or allowable losses should be determined in accordance with an acceptable commercial method (LAM05040).

The allocation method adopted must:

• fairly represent the contribution of the assets to the company’s BLAGAB during the period that they have been held for the company’s long-term business.
• be consistent with the methods adopted to establish the BLAGAB element of income, losses and expenses and to divide the trade profit between BLAGAB and other long-term business.

For most purposes, these rules are on all fours with the rules for allocating income – it is the same assets producing the income and the gains therefore consistency would be expected. However there is one important difference related to timing.

The main difference from the rules for income is that the allocation must fairly reflect the contribution of the asset to BLAGAB over the whole of the period for which it was held by the company, rather than simply reflecting the use of the asset and pattern of business at the time of disposal.

For example, if an asset is acquired when the proportion of BLAGAB business written was 50% and sold when the proportion was 25%, an allocation of 25% of the chargeable gain to BLAGAB is unlikely to reflect the contribution of the asset to BLAGAB over the period it was held.

However, given the long periods over which assets might be held and the difficulty in accurately calculating the impact of such changes over time, pragmatic approaches are essential.

Where the proportions of BLAGAB and other long-term business have not varied to any significant extent over the period the asset was held by the company it is not necessary to consider any further review. In practice, in most cases, an apportionment of the chargeable gain or allowable loss that mirrors the methodology that was used (or would have been used) to establish the BLAGAB element of income from the asset is likely to satisfy the two requirements (bulleted) above.

Some fact patterns may require a different approach. For example, it may not be appropriate for a gain on long-held commercial property to be allocated on the basis of current year policyholder liabilities if the business mix of the company has shifted markedly over the period of ownership. Policyholders would have been credited with increases in valuation year-by-year not just in the final period.

Holdings in collective investments taxed under TCGA92/S212 are subject to deemed disposals at the end of each period. The holding period is therefore never longer than a year, and so current period apportionment would be appropriate.

Consideration may also need to be given to the impact of reorganisations, demutualisation, Part VII transfers or other major transactions.

Although TCGA92/S211 provides for a no gain, no loss transfer, the period over which the transferee has held the asset starts from the transfer date.

In such cases the methodology applied to establish the BLAGAB-element of the gains or losses may require review of the fact pattern in previous periods to produce a better estimate of the contribution of the asset to BLAGAB (LAM03200).