LAM11020 - Long-term business fixed capital: background and purpose: FA12/S137

Background

FA12/S137 introduced the concept of a life insurance company having long-term business fixed capital (LTBFC) where the company holds long-term business assets which are structural to the business. The legislation at FA12/S137 takes effect from 1 January 2013.

Prior to 2013, assets reported in the regulatory returns as ‘other than for long-term business assets’ – referred to as the ‘shareholder fund’- were, apart from a few exceptions, excluded from the calculation of trade profits. In contrast, movements in asset values within the long-term fund, and the income arising from them, were included in trade profits. A limited exception was introduced by FA89/S83XA which treated shares, debts and loans in insurance dependants as structural assets not giving rise to a trading receipt or expense (but only where the assets were held in a non-profit fund). That was necessary because some insurers held shares in subsidiaries in their long-term fund and it was inappropriate to include the profits and losses in trading income because they were recognised as being capital assets.

FA89/S83XA was also introduced as an anti-avoidance measure to prevent a company obtaining a tax deduction on the write-down of a subsidiary held in the long-term fund.

The new life tax regime does not recognise the ‘shareholder fund’ other than under the transitional rules (FA12/SCH17/PARA35) where assets of what was previously referred to as the shareholder fund were grandfathered into LTBFC (LAM11050). Following the introduction of Solvency II in 2016 the regulatory return no longer has any reference to assets being for other than long-term business.

Therefore, all assets of a life company, unless not held for the purpose of the life insurance business (see LAM11070), now support the life insurance trade unless they qualify for the specific LTBFC exception.

The purpose of the LTBFC legislation

Although there are still a few life companies with general insurance business, a life insurer is now only permitted to conduct life insurance business (PRA Supervisory Statement SS8/15 Solvency II: composites). For that reason, in most cases, all of a life insurance company’s assets will be held for the purpose of the long-term business. The assets will be held as investments, backing the insurance liabilities, for example, to meet the insurance liabilities or contribute to the regulatory capital of the business. Assets will be held in the company’s long-term insurance fund with income, gains and expenses included in the computation of trade profits unless the asset qualifies as LTBFC.

The purpose of FA12/S137 is to ensure that any income from structural assets and any increase or decrease in the value of those assets is excluded from the computation of trade profits. This is on the basis that these assets are structural to the business rather than trading assets.