6 Life Company Taxation

Question 1

Which contracts are included in a company’s non-BLAGAB tax fund? (9)

Answer 1

1. Pensions
2. ISAs
3. Child Trust Funds
4. Immediate Needs annuities
5. Reinsurance of life assurance
6. Business sourced from overseas.
7. PHI business
8. Protection business written after 1/1/2013
9. NB companies that have only ever written protection business can opt to have all business as non-BLAGAB

Question 2

Which contracts are included in a company’s BLAGAB tax fund? (4)

Answer 2

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.

Question 3

Describe the components of I in the I-E tax basis for BLAGAB business. (6)

Answer 3

1. Investment income from property, gilts, bonds and deposits.
2. Realised chargeable gains on property and equities (gains are indexed, losses are not).
3. Mark to market or mark to model capital movements in gilts, bonds and derivatives.
4. Miscellaneous income (e.g reinsurance income).
5. Dividend income from equities (UK and OS) is excluded
6. 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.

Question 4

Describe the components of E in the I-E tax basis for BLAGAB business. (4)

Answer 4

1. BLAGAB share of renewal expenses and overheads.
2. Acquisition expenses spread evenly over 7 years.
3. The income component of general annuities (the total annuity payment less the corresponding capital content).
4. Any unrelieved expenses (XSE) brought forward from previous years.

Question 5

State the formula for trading profit for which the non-BLAGAB fund is liable to tax. (11)

Answer 5

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.

Question 6

Set out the tax rates that apply to a mutual insurance company. (2)

Answer 6

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.

Question 7

In the context of the “Minimum Profits Test” for proprietary Life Companies, describe BLAGAB minimum profit. (6)

Answer 7

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.

Question 8

Describe the Minimum Profits Test that applies to Life Companies. (5)

Answer 8

1. Minimum Profit is compared with an adjusted I-E result (I-E plus the BLAGAB share of dividend income).
2. 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.
3. 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.

Question 9

Describe circumstances in which a company may be XSE. (8)

Answer 9

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.

Question 10

Set out the tax rates that apply to a proprietary life insurance company. (4)

Answer 10

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.