6 Life Company Taxation Flashcards
Which contracts are included in a company’s non-BLAGAB tax fund? (9)
- Pensions
- ISAs
- Child Trust Funds
- Immediate Needs annuities
- Reinsurance of life assurance
- Business sourced from overseas.
- PHI business
- Protection business written after 1/1/2013
- NB companies that have only ever written protection business can opt to have all business as non-BLAGAB
Which contracts are included in a company’s BLAGAB tax fund? (4)
The BLAGAB fund:
1. Includes life assurance and general annuity contracts.
2. Excludes those contracts listed under non-BLAGAB.
3. Excludes life assurance protection business written on or after 1/1/2013.
Companies that have only ever written protection business may elect to have all of their business classified as non-BLAGAB.
Describe the components of I in the I-E tax basis for BLAGAB business. (6)
- Investment income from property, gilts, bonds and deposits.
- Realised chargeable gains on property and equities (gains are indexed, losses are not).
- Mark to market or mark to model capital movements in gilts, bonds and derivatives.
- Miscellaneous income (e.g reinsurance income).
- Dividend income from equities (UK and OS) is excluded
- BLAGAB share of any units in a UT, UCITS or OEIC are notionally sold are repurchased each year and any indexed gain is spread evenly over 7 years.
Describe the components of E in the I-E tax basis for BLAGAB business. (4)
- BLAGAB share of renewal expenses and overheads.
- Acquisition expenses spread evenly over 7 years.
- The income component of general annuities (the total annuity payment less the corresponding capital content).
- Any unrelieved expenses (XSE) brought forward from previous years.
State the formula for trading profit for which the non-BLAGAB fund is liable to tax. (11)
P + I’ + A’ - E - C - (V1 - V0) + (D1 - D0) - L
Where the items are the non-BLAGAB share of:
P = Premiums Receivable
I’ = Investment Income
A’ = Change in the Value of Assets
E = Expenses including commission
C = Claims paid, including terminal bonus
V0 = Value of liabilities at the start of the year
V1 = Value of liabilities at the end of the year.
D0 = Value of DAC assets at the start of the year
D1 = Value of DAC assets at the end of the year
L = Absolute amount of any non-BLAGAB loss brought forward from the previous yearend.
Set out the tax rates that apply to a mutual insurance company. (2)
BLAGAB fund: the I-E result is taxed at the policyholder rate (20%)
Non-BLAGAB fund: a mutual would not normally have a taxable non-BLAGAB profit.
In the context of the “Minimum Profits Test” for proprietary Life Companies, describe BLAGAB minimum profit. (6)
The Minimum Profit is the accounting profit for BLAGAB business:
- including BLAGAB share of non-taxable dividends,
- after a deduction for policyholder bonuses
- and an adjustment for tax on policyholder I-E items.
If this is negative, the minimum profit is taken as zero and a loss can be carried forward to the following year.
It is also known as BLAGAB trade profit.
Describe the Minimum Profits Test that applies to Life Companies. (5)
- Minimum Profit is compared with an adjusted I-E result (I-E plus the BLAGAB share of dividend income).
- If Minimum Profit > Adjusted I-E then allowable expenses in the I-E calculation are restricted so that the two are equal. The amount of expenses restricted is carried forward as XSE and added to the following year’s BLAGAB expenses.
- If Minimum Profit > I in the adjusted I-E then the whole of E is restricted and I is increased up to the minimum profit. The amount of increase in I is carried forward in a form that is equivalent to additional restricted E.
Describe circumstances in which a company may be XSE. (8)
A recently established company may be XSE as it:
- has low accumulated investment funds (low I)
- is incurring relatively onerous expenses (high E)
A company may be temporarily XSE due to:
- large BLAGAB profits resulting in the minimum profits test biting
- significant capital falls in the bond market so that the net return from bonds and gilts is negative.
Set out the tax rates that apply to a proprietary life insurance company. (4)
BLAGAB fund:
If the minimum profits test bites:
I-E is all taxed at the corporation tax rate.
If the minimum profits test does not bite:
Part of the unadjusted I-E equal to the minimum profit not derived from dividends is taxed at the corporation tax rate, and the balance is taxed at the policyholder tax rate.
Non-BLAGAB fund:
Trading profits are taxed at the corporation tax rate.