LAM07010 - Trade profits: Introduction - BLAGAB and non-BLAGAB trade profits and losses: FA12/S66

This manual has yet to be updated for the interest restriction and changes to relief for carried forward losses introduced by Finance (No.2) Act 2017.

Where a life insurance company carries on BLAGAB as well as other long-term business it is treated as carrying on two separate businesses for corporation tax purposes by FA12/S66. These consist of BLAGAB and non-BLAGAB long-term business and separate calculations of trade profits are required for each. Where an insurer also carries on short term business that is treated as a separate trade.

FA12/S71 provides that in the case of non-BLAGAB the charge to tax arises under CTA09/S35 with the result that the wider trading provisions in Part 3 of CTA09 apply. By contrast the charge to tax on BLAGAB business arises under FA12/S68 and is on the I-E profit. The main purpose of calculating a BLAGAB trade profit is to apply the minimum profits test (LAM07230) and determine the policyholders’ share of profits (LAM06010). In addition, if a BLAGAB trade loss arises it may be used in a number of different ways (LAM07310) and a BLAGAB trade loss can arise even where there is an I-E profit.

There are some differences in the method of calculation of BLAGAB and non-BLAGAB trade profits but most of the rules are common to both. The most significant differences, in the case of BLAGAB trade profits, are that an adjustment for policyholder tax is allowed and the capital allowances which can be claimed are less restricted than with non-BLAGAB trade profits.

The specific considerations explained further are:

  • financial statements: an understanding of some specific features of life company accounts and their interaction with tax; GAAP for insurance companies LAM07020, technical provisions for policyholder liabilities LAM07030, deferred income and expenses LAM07040 and the fund for future appropriations (or unallocated divisible surplus) LAM07050
  • trade profits: rules for calculating BLAGAB and non-BLAGAB profits; specific rules for inclusion or exclusion of income, expenses and other deductions, including capital allowances LAM07100-07150
  • BLAGAB trade profits – purpose of the calculation and specific rules including minimum profits test LAM07200-LAM07230
  • trade losses: non-BLAGAB LAM07300 and BLAGAB LAM07310

In the case of mutual business a trade profits computation under CTA09/S35 is not required.