LAM11040 - Long-term business fixed capital: structural assets: FA12/S137(3) and SI 2023/1236
An asset forms part of a life insurance company’s long-term business fixed capital (LTBFC) if it is:
held for the purposes of the long-term business and
a structural asset.
This section of the guidance deals with the meaning of “structural asset”. The term is not used anywhere else in the Taxes Acts and is not synonymous with the distinction between capital and revenue expenditure.
FA12/S137(3) and SI 2023/1236 set out which assets should be, and should not be, regarded asstructural assets of an insurance company’s long-term business.
Except in specific circumstances, covered in the guidance below, holdings in vehicles that hold investments that would be taxable as trading income if they were held directly by the insurance company will not fall within the definition of structural assets.
The nature of a life insurance company’s trade involves holding assets such as shares, bonds, commercial property and infrastructure for long periods to meet future policyholder liabilities. It is common for life insurance companies to hold portfolios of equities and properties for many years, decades in some cases, in order to meet policyholder liabilities without this calling into question their status as trading assets.
FA12/137(3)
FA12/137(3) reproduced the rule in FA89/S83XA (now repealed). It states that shares, debts and loans which, if they had been held at 31 December 2012 and would have been included in lines 21 to 24 of Form 13 of the regulatory return, are regarded as structural where they are held outside a with profit fund. Lines 21 to 24 of the regulatory return of that period referred to UK insurance dependants and other insurance dependants.
Why does FA12/137(3)(b) specifically mention insurance dependants? There are two reasons. First it provides an example of an asset which is part of the fabric of the wider business of the group, though a more exhaustive definition is now provided in the regulations. Second, where shares in an insurance subsidiary are held in a non-profit fund, it would be possible to transfer the business of the subsidiary to the non-profit fund, by means of a Part VII transfer, and claim a trading loss on the reduction in the value of the shareholding. If the shareholding is structural and treated as LTBFC under FA12/S137, it will not be possible to claim such a trading loss.
Regulations
FA12/S137(5) is a regulation making power to allow the Treasury to specify assets which are, or are not, to be regarded as structural assets of an insurance company’s long-term business. The first use of this power was in November 2023 to lay SI 2023/1236. These Regulations apply to accounting periods beginning on or after 1 January 2024.
Regulation 2 sets out which assets are, and are not, to be regarded as structural assets of an insurance company’s long-term business.
There are two requirements for an asset to be regarded as a structural asset.
The first requirement is that the asset is held by the company in a fund that is not a with-profits fund. This is because assets held in with-profits funds of proprietary companies are available to meet policyholder liabilities. They will not be structural assets because they contribute to the benefits enjoyed by the policyholders.
There is an exception to the requirement that assets in a with-profits fund cannot be structural for companies carrying on mutual life insurance business. This is appropriate since mutual insurers traditionally hold their subsidiaries in a with-profits fund. The exception facilitates group relief between trading subsidiaries. Mutual life assurance business should be read as to have the same meaning as in FA12.
The second requirement is that the asset falls within the specified description of assets in Regulation 3.
Assets which fall outside Regulation 3 or FA12/S137(3) are not to be regarded as structural assets.
Certain assets of an insurance company’s long-term business (FA12/S65 and S63) qualify as structural assets. Shares, debts and loans held in a 51% subsidiary qualify as structural assets, but only if the entity falls into one of the following categories:
an insurance company or non-resident insurance company
a company whose principal activity is to provide services to group members. For the purpose of these regulations, providing services means:
* performing investment management activities (including a minority co-investor in collective investment schemes)
* distributing insurance and investment products to third parties
* acting as corporate trustees
* providing payroll or employment services
* providing property services
* providing technology and IT services
* providing administration and management services
a holding company, or a holding company held by that holding company, whose business consists wholly or mainly of holding shares or securities in one of the qualifying companies listed above. If the holding company, or holding company held by that holding company, sells a subsidiary then its business is re-evaluated. If it no longer qualifies then it will retain structural asset treatment only until the end of that accounting period.
a company falling within any of the above categories which has subsequently become dormant.
Where an insurer has interests in an entity limited by guarantee, which entitle it to more than 50% of the assets available for distribution on winding up of the entity, then those interests will be structural assets, but only if the entity falls into one of the categories above.
Other assets which qualify as structural assets are:
Interests in the part of a property occupied by the insurance company or a member of the same group, from which the wider insurance business is carried on.
51% subsidiaries of companies carrying on mutual life assurance business. This can include holding companies, but not 51% subsidiaries that are investment management companies. These are companies whose business consists wholly or mainly in the making of investments and which derive the principal part of their income from the making of investments. 51% subsidiaries that are held to achieve a matching adjustment also do not qualify under this criteria. Instead there is a separate provision dealing with such vehicles.
Goodwill as defined in CTA2009/S715(3).
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Matching adjustment companies. It is common under the Solvency II regime for life insurers to transfer certain assets to subsidiary entities (often referred to as Special Purpose Vehicles - “SPVs”) to obtain a regulatory benefit called the “matching adjustment”. The assets transferred in these structures will often represent more complex forms of debt (e.g. equity release mortgages and certain infrastructure bonds) or lower risk forms of property/equity investment.
These structures are intended to be economically neutral, with the SPV typically earning little or no profit. In order to obtain the matching adjustment most of the profit will be returned to the life insurer by way of debt instrument. Regulation 3(4) treats shares in a company held by an insurance company to obtain a Solvency II regulatory matching adjustment as structural assets. However, the principal purpose for the insurance company in holding those shares must be to obtain that matching adjustment.
Assets ceasing to be structural assets
The effect of FA12/S122 is to treat long-term business fixed capital assets as held otherwise than for the purposes of the long-term business. This means that assets which are no longer structural assets within FA12/137 will cease to be deemed to be held outside the insurance company’s long-term business and will be treated as assets of the insurance trade.
This can give rise to a box transfer under FA12/S116(6).
Whenever there is a box transfer, Sch 7AC para 6(1)(c) TCGA 1992 denies SSE (substantial shareholding exemption) treatment and these rules will apply in the normal way. That means if an asset ceases to be treated as a structural asset within FA12/S137 the existing rules will apply and SSE may not be available.