LAM12110 - International and cross border: Offshore funds and BLAGAB: interaction of I-E and CFC rules TIOPA10/S371BH and Regulation 5 of SI012/3044
Where a life insurance company holds an interest in an offshore fund that is also a CFC, the profits within the fund are potentially subject to double taxation. Firstly, it will be subject to tax under the I-E rules, for example, on chargeable gains arising from the annual deemed disposal calculation at TCGA92/S212 and secondly, to a potential CFC charge under TIOPA10/PART9A. The Regulations seek to ensure no double charge to tax arises broadly where tax is already dealt with by inclusion in FA12/S73.
Example:
The following simplified example illustrates how the profits might be taxed in a company writing a mixture of 40% BLAGAB and 60% non-BLAGAB business:
An offshore fund holding
- increases in value in the period by £400 and
- Pays a dividend of £100
The CFC position would be as follows:
| BLAGAB | Non-BLAGAB | |
|---|---|---|
| Increase in Value | £160 allocated to BLAGAB | £240 allocated non-BLAGAB |
| CT treatment | TCGA92/S212 and FA12/S73 Step 2 ‘mark to market’ increase in value £160 spread over 7 years TCGA92/S213 | £240 taxed as trading income |
| CFC treatment | SI2012/3044/Regulation 5 £160 excluded from CFC charge as increase in value included in FA12/S73 Step 2 | Excluded as increase taxed as trading income TIOPA10/S371BG |
| Dividend | £40 allocated | £60 allocated non-BLAGAB |
| CT treatment | Dividend exempt in I-E regime | £60 taxed as trading income |
| CFC treatment | CFC exclusion under TIOPA10/S371BH Condition F as dividend would not be included in FA12/S73 step 1 | Excluded as dividend taxed as trading income TIOPA10/S371BG |
Non-BLAGAB is effectively excluded under the normal CFC charging provisions on the basis that the conditions in TIOPA10/S371BG would be met. The assets are shares held as trading assets with increases in value and dividends included in the trading computation as income. The full conditions are explained in INTM194750.
The I-E share of the return may not be taken into account as income in all cases, with chargeable gains provisions applying. The provisions in TIOPA10/S371BH cover the treatment of BLAGAB, and removes any CFC charge where income and increases in value are already included in the I-E or where dividends would qualify for exemption. Where this is not the case, there will be a CFC charge on BLAGAB profits. The International Manual INTM194800 sets out in full the underlying conditions and explains how to calculate a charge should this arise.
Where assets are not held solely to back BLAGAB, TIOPA10/S371BH(10) sets out how to determine the ‘apportioned profit’. The BLAGAB component is determined in accordance with the apportionment rules in FA2012/Part2/CH4 LAM05020.
In practice, most offshore funds and other investments would meet the requirements for exclusion from the CFC charge. However, there can be situations where that is not the case. For example, property funds may not have increases in value included in the I-E as these may not be within TCGA/S212. However, the CFC legislation will exclude these from charge if the insurer includes the increase in value in the I-E computation under step 2 of FA12/S73. (TIOPA 2010/S371BH(6) as amended by SI2012/3044 Regulation 5). In practice, this will be the case if the amount is included in step 2 regardless of whether or not it is clear that the amount would technically be included in step 1 or step 2.
Life insurers may also have assets held as long-term business fixed capital (LAM11000) which would be potentially within the scope of the CFC rules as not falling under either I-E exclusions or held as trading assets. These would be subject to the normal CFC rules.