LAM13060 - Transfers of long-term business: Intra-group transfers and demutualisations: FA12/S129

Transferee ‘stands in the shoes’ of the transferor for tax

Where the transferor and transferee are members of the same group when the transfer occurs and the transferee is within the charge to corporation tax in relation to the transfer, FA12/S129 ignores any trade profits or losses arising from the transfer and disengages the transfer pricing rules so that the transferee effectively “stands in the shoes” of the transferor. That outcome is achieved by disregarding any amounts relating to the transfer which are credited or debited in the accounts, of either party, which ensures that an intra-group transfer gives rise to neither a profit nor loss. This approach also applies to demutualisation but not to transfers into or out of a with-profits fund unless the transfer is with another with-profit fund. This follows from FA12/S129(10) and denial of neutrality is limited to that part of a transfer which is a with-profits transfer. The expectation is that transactions between shareholders and with-profit funds will occur at fair value.

Differences in valuation between transferee and transferor

However it is possible that the parties to the transaction might place different values on some of the assets or liabilities of the transferred business. If that valuation difference were disregarded it could result in an amount of profit either being taxed twice or falling out of account altogether. The rules in FA12/S129(6)-(8) ensure that outcome is avoided. Any valuation differences on items that would normally be brought into a life company trade profit computation are treated as a trading receipt or expense arising to the transferee in the accounting period in which the business is transferred.

The starting point for the calculation in S129(8) is the “net amount” recognised by the transferor and transferee. That amount is represented by:

  • the transferred assets less
  • liabilities relating to the insurance contracts at the point immediately before (transferor) or immediately after (transferee) the transfer.

The relevant liabilities and assets are the liabilities and assets of the insurance business transferred whose values impact upon the trading profit. An amendment to S129(8) clarified this position for transfers on or after 31 December 2015, making it clear that only those liabilities and assets which give rise to profits or losses within the trade calculation rules are compared.

As the net amount involves subtracting the liabilities from the assets it is capable of being a negative amount where the transferred liabilities exceed the assets.

The operation of these rules means that:

  • any amounts relating to either assets and liabilities in respect of a transfer debited or credited in the accounts in consequence of the transfer will be disregarded by FA12/S129(4) or (5).
  • both assets and liabilities relating to the insurance contracts will be taken into account, in S129(6), for the purposes of calculating any difference in the values recognised by the transferor and transferee.

Where a mutual insurer transfers its whole business to a third party it is possible that the rules in FA12/S129 and S130 ((transfers between non-group companies) – see LAM13070) - both apply as the transaction is treated as a demutualisation and the business is transferred to a non-group company. In those circumstances the acquiring company might recognise Present Value of In-Force (PVIF) on its balance sheet. However PVIF is not an asset which gives rise to an amount which is recognised by S129(8) and therefore it will not be taken into account in arriving at the ‘net amount recognised’. In those circumstances relief will be given under s130 because the prohibition in S130(5) will not be triggered. It follows that no amount will be taken into account under S129 and also S130.

The net value of the assets less the liabilities of each of the transferor and transferee are compared to arrive at an arithmetical difference which will be recognised as either a receipt or expense of the transferee. This difference is an absolute amount and is only capable of having a positive value (i.e. it cannot be negative) regardless of which amount is larger. This is the case because the difference is derived from a comparison rather than a subtraction of one value from another.

In accordance with FA12/S129(6)-(7) if the result of adding that difference to the transferor’s net amount is that it is equal to the transferee’s net amount then it is treated as a receipt of the transferee. If, on the other hand, that parity is only achievable by subtracting the difference from the transferor’s net amount then the difference is an expense of the transferee. This can be illustrated by two examples:

Example 1 Transferor £’m Transferee £’m
Assets 1,000 1,100
Liabilities (950) (975)
“Net amount” 50 125
i (6)(a) transferee 125  
ii (6)(b) transferor 50  
iii Difference 75  

Parity requires adding (iii) to (ii)

7(a) applies to tax a receipt of £75m on the transferee.

Example 2 Transferor £’m Transferee £’m
Assets 1,000 975
Liabilities (950) (1,100)
“Net amount” 50 (125)
i (6)(a) transferee (125)  
ii (6)(b) transferor 50  
iii Difference 175  

Parity requires subtracting (iii) from (ii)

7(b) applies to recognise an expense of £175m in the transferee