LAM11060 - Long-term business fixed capital: tax treatment: FA12/S137 and FA12/S122
Different tax treatment for LTBFC assets
Where an asset forms part of the company’s long-term business fixed capital (LTBFC) (LAM11030), the ordinary tax rules applicable to an investment company apply instead of the life insurance tax rules. The table below highlights the key differences in tax treatment between LTBFC, I-E and the trading computations. The difference in tax treatment for all reliefs and losses is summarised in LAM15000 and the accompanying diagram.
| LTBFC | BLAGAB I-E | BLAGAB trade profit | Non-BLAGAB trade profit |
|---|---|---|---|
| Dividends not taxable | Dividends not taxable | Dividends included | Dividends taxable |
| Equity holding, taxed on a realisation basis but Substantial Shareholding Exemption (SSE) may apply where holding is 10% or more | Equity holding, taxed on a realisation basis rather than mark to market. SSE may exempt gains and losses where holding is 30% or more | ||
| Equity holdings, mark to market movements are not taxable | Equity holdings, mark to market movements are taxable | Equity holdings, mark to market movements are taxable | |
| Loan Relationship holdings, mark to market movements taxable | Loan Relationship holdings, mark to market movements taxable | Loan Relationship holdings, mark to market movements taxable | Loan Relationship holdings, mark to market movements taxable |
| Elections under TCGA92/171-171C can apply to LTBFC – see LAM03220 for full details. |
Take the example of a life insurance company with a 60% shareholding in another insurance company. If the asset was held as LTBFC there would be no tax payable on dividends received. Also, any gain on disposal would be exempt under the SSE and there would be no recognition of any increase in value of the shares over the period held. The shareholding would effectively be free of tax. Contrast this with a 5% holding in the same asset which would be treated as a trading asset. In that case the dividends received along with the movement in the value of the shares would be included in the computation of trade profits.
Given the significant difference in tax treatment depending on whether the asset is held as LTBFC or as a trading asset, it is important from a practical point of view that HMRC are aware of and agree on which assets are treated as LTBFC.
The mechanics of the tax legislation
One of the conditions for an asset to qualify as LTBFC is that it must be held for the purposes of the long-term business. Therefore the allocation rules in Chapters 4 and 6 of FA12 still strictly apply to these assets in the same way they apply to other assets. However in practice allocations of investment return and profits will not be made for assets within LTBFC because they will be ignored in the I-E computation and the trade profit computations.
The exclusion of LTBFC assets from the I-E and trading computations is achieved by the following provisions:
- FA12/S74(6) provides that in calculating BLAGAB income, no account is taken of income arising from an asset forming part of LTBFC
- FA12/S75(3) makes similar provision for BLAGAB chargeable gains and BLAGAB allowable losses
- FA12/S113 provides that receipts or expenses (for example, loan relationship debits) which arise from an asset forming part of LTBFC are left out of account in calculating BLAGAB and non-BLAGAB trade profits
- FA12/S122 provides that assets forming part of LTBFC are treated as not being held for the purpose of the long-term business for the purposes of the rules on box transfers and share pooling. Therefore shares forming part of LTBFC form or contribute to the s119(1)(e) or s120(1)(e) FA 2012 share pool assets (both the 1982 and s104 TCGA pools) and are therefore not subject to the rules in s212 TCGA (deemed disposal gains and losses)
The effect of the above provisions is that investment return and profits from LTBFC assets are excluded from the BLAGAB and non-BLAGAB computations.
Transfers of long-term business
The general rules concerning transfers of long-term business are dealt with at LAM13000. FA12/SCH17/PARA35A specifically deals with the LTBFC assets on a transfer of long-term business.
Where a company (A) transfers all of its basic life assurance and general annuity business and non-BLAGAB business to another company (B), and the transfer is a relevant intra-group transfer, the assets form part of the LTBFC of company B instead of company A.