LLM6160 - Conversion: tax reliefs: background

Most traders who transfer a business to a company, or a partnership, are entitled to carry forward any unused trading losses. ICTA88/S386 and ITA07/S86 applies to the transfer of a business to a company, and where an individual transfers the business to a partnership of which they are a member ICTA88/S385 and ITA07/S83 will generally apply to allow loss to be carried forward. However, these reliefs do not apply in the context of a Lloyd’s conversion. There is no transfer of a business as required for the trade transfer relief, and trade carry forward relief is not available because the SLP does not succeed to the trade previously carried on by the individual.

The technical reason for this is that in the Lloyd’s “interavailability” rules under which most conversions take place there is no statutory “transfer of insurance business” as defined in the regulatory provisions of the Financial Services and Markets Act 2000. The Name’s assets are transferred to the new vehicle but the existing liabilities remain with the Name. In addition, under Lloyd’s three year accounting system there is a period of overlap when the Name trades in both limited and unlimited liability form, so the necessary continuity of the Name’s trade by the Nameco or SLP/LLP is absent.

TCGA92/S162 provides for deferral of charges to capital gains tax where a business is transferred to a company and applies in similar circumstances to trade transfer relief. The capital gains legislation is worded differently, but the circumstances in which relief is available are essentially the same. Section 162 requires the transfer of the business as a going concern, whereas in a Lloyd’s conversion there is no transfer of the business, only of the assets of the business (usually in stages).

FA04 (as amended by SI2006/111) introduced new reliefs, broadly equivalent to the income tax and capital gains tax trade transfer reliefs for Names who convert to underwriting via a corporate member (meaning here, as in Lloyd’s rules, incorporated companies, SLPs and LLPs). A Name who transfers underwriting business to a corporate member under a Lloyd’s conversion scheme, and who meets all the relevant conditions, can claim the following reliefs

• To set unused trading losses against income received from the corporate member following conversion on or after 6 April 2004.
• To defer charges to capital gains tax on the transfer of syndicate capacity to a Nameco on or after 6 April 2004.
• To defer charges to capital gains tax on the transfer of assets included in Funds at Lloyd’s (FAL) to a Nameco on or after 6 April 2004. This relief applies to FAL assets transferred to Namecos which commence underwriting on or after 6 April 2004, and also to FAL assets transferred after that date to Namecos which started underwriting before that date.