LAM10210 - Reinsurance: Circumstances when cedant not subject to imputation of investment return under S90(4): reinsurance arrangements entered into on or after 1 June 2018

FA12/S90 provides the authority for regulations taking certain reinsurance arrangements and insurers outside the scope of S90 and therefore the requirement to impute return in the cedant. SI2018/538/Regulations 8-11 define ‘prescribed arrangements’ which are excluded from the operation of S90.

	Prescribed arrangements: Regulations 8-11 The Insurance Companies (Taxation of Reinsurance Business) Regulations 2018/538 (reinsurance arrangements entered into on or after 1 June2018)
Regulation 8(2): Excluded business (group companies)	Investment return taxable as I in the UK reinsurer or UK PE of reinsurer as the business is within regulation 5. Cedant will not be taxed under S90, avoiding a double charge.
Regulation 8 (3): Cedant taxed S68	Investment return on assets backing the business taxable as I in the cedant therefore S90 will not apply to prevent double charge.
Regulation 9: Reinsurer in EEA	Reinsurance is intra-group, the reinsurer is resident in a non-UK EEA state and the investment return is taxed in the reinsurer on a basis equivalent to I-E at a rate at least equal to the UK policyholder’s rate of tax.
Regulation 10 : Non-investment risk	This takes out reinsurance where there is effectively no shifting of policyholder investment income as risks reinsured do not relate to investment.
Regulation 11: Protection and immediate needs annuities	Carves out from S90 charge pre 2013 protection, which is BLAGAB, as this business has little investment risk. Reinsurance of immediate needs annuities is also excluded from S90.
	All of these exclusions from S90 may be subject to anti-avoidance rule in Regulation 13.

Regulation 8 effectively means that there is no imputation of income under FA12/S90 where either the reinsurer or the cedant is already subject to a charge under FA12/S68 on the related investment income.

Regulation 8(2) will apply where the reinsurer is already within the I-E charge on the related investment income as the business is excluded business LAM10300.

Regulation 8(3) can apply where there is a deposit back arrangement. Assets are deposited, or lent back, to the ceding company as collateral to cover the insurance liabilities. Under those circumstances the cedant is likely to reflect the debits and credits arising from the assets in their GAAP accounts. If that is the case, the investment return on the deposited back assets is brought into their I-E profit computation under the normal I-E rules FA12/S74.

As a result, provided assets deposited back are genuinely those that back the liabilities under the reinsured business, the reinsurance will be a ‘prescribed arrangement’ not subject to S90. A ‘funds withheld’ arrangement may bring a similar result – where the insurer retains the assets rather than having a ‘deposit back’. Nevertheless if the deposit back, or funds withheld, arrangement is structured so that amounts are due by the cedant which would be deductible in the I-E calculation, for example where the deposit back is itself a loan relationship, then Regulation 8(3) cannot apply.

For contracts entered into before 1 June 2018 see LAM10220.