LLM5270 - Names: special reserve funds: taxation

The fund is tax free. Income arising on assets in the fund, capital appreciation of assets within the fund and gains and losses on disposal of assets from the fund are not subject to income tax or capital gains tax (FA93/SCH20/PARA9). However, any capital appreciation or investment income that has been rolled up tax free within a Name’s fund is ultimately brought in to charge to tax either when withdrawals are made, or when the remaining balance is paid out on cessation.

Income tax deducted from income arising on fund assets is repayable to the fund manager (in practice, Lloyd’s Members’ Funds Department) after 31 December each year on receipt of a claim. The entitlement to payment of tax credits was withdrawn by F(2)A97 for dividends paid on or after 6 April 1999.

Taxation of transfers and withdrawals

The amount of the permitted transfer from profits into the SRF is a deductible trade expense (FA93/SCH20/PARA10), allowed for the tax year in which the profits out of which the payment is made arise for tax purposes. For instance, a Name’s profits for the 2003 account are declared in June 2006 at £100,000. From this, the Name chooses to transfer £45,000 to his SRF. A deduction of £45,000 is due from the 2006-07 underwriting profits since the profits of the 2003 account arise for tax purposes in 2006-07.

Withdrawals from an SRF are taxable trading receipts of the tax year in which the results which trigger the withdrawals arise for tax purposes. For instance, a Name’s losses for the 2004 account are declared in June 2007 at £20,000. This triggers a withdrawal of the remaining value of his SRF of £15,000. This £15,000 is a taxable receipt of 2007-08 since the results of the 2004 account arise for tax purposes in 2007-08.

Withdrawals from funds are reported to Names on the form CTA1 (LLM1170). The reported withdrawal is the net figure taking into account the effect of stop loss recoveries, and any amounts paid back into the fund where the final loss was less than the aggregate of the cash calls.

The figure will also include any surplus paid over to the Name if the fund’s value exceeded 50% of the overall premium limit at the previous 31 December.