I-E comp Flashcards
Step 1: BLAGAB income
All of the types of income listed here will be included in the first step of the I-E computation. The income will be added together to calculate the total BLAGAB income.
The main sources of income are usually from the net credit on loan relationships (interest investments) and net profit on UK property business (rental property). These amounts are typically calculated in line with principles used for other companies ie. Parts 5 to 7 CTA 2009 for loans relationships and derivatives, or Part 4 CTA 2009 for property business profits.
Companies will also typically invest in equities. However, dividends are not generally taxable due to the dividend exemption (Part 9A CTA 2009) that applies to portfolio dividend income, so dividend income is not included in this step.
Impacts of debits on BLAGAB income:
The key thing to note for certain types of income (for example loan relationships) is that we take the net income. This means that we can offset any debits against any credits for that specific income. However if debits exceed credits, we deem this income to be nil at this stage, and we do not deduct any excess debits against other BLAGAB income. Any excess debits will be deducted elsewhere in the computation.
Step 2: Net chargeable gains
In addition to income, chargeable gains on capital assets are brought into the I-E computation in step 2. The typical gains brought into the calculation include equities, properties and unit trust deemed disposals. The method of calculation of these gains depends on the nature of the capital asset (most of which are the same rules as a normal corporate entity).
Equities: Chargeable gains for equities are calculated in the same way as normal trading companies (proceeds less base cost), the same indexation and share pooling (acq same day, acq following 30 days then s104 pool) rules apply.
Properties: As with share disposals, a disposal of property is calculated in the same way as for normal trading companies (proceeds less base cost and any indexation)
Step 2: UTDDs
Rules for the taxation of gains on collective investments are detailed in TCGA 1992 s212. In essence, these are deemed to have been sold for market value and then reacquired at the end of each year, with the resultant gain or loss spread over 7 years for tax purposes. This is done as otherwise an insurer could hold its assets within collectives and never realise a gain for tax purposes.
This does not apply to assets taxed under the loan relationship rules. If a significant proportion (e.g. greater than 60%) of a collective holding is made up of loan relationship assets, then the investment is taxed like a loan relationship asset instead of following the above rules (referred to commercially as ‘bond funds’).
Calculation of unit trust deemed disposal:
Calculate BLAGAB net gain/loss in the period
Section 213 spreads BLAGAB gains over 7 years
Loss can be carried back to the previous 2 accounting periods.
Step 2: BLAGAB capital losses
Where capital losses arise under these calculations, there are specific rules in I-E computations:
BLAGAB capital losses can be used against BLAGAB gains. In some cases, these may also be offset against other non-BLAGAB gains in the company or wider group.
Unit Trust Deemed Disposal (‘UTDD’) losses can be used against other UTDD gains and other BLAGAB gains. UTDD losses may also be carried back and offset against UTDD gains in the last two accounting periods (on a LIFO basis), unlike other capital losses
Step 3: Sundry receipts
This step brings in other income not taxed elsewhere. This is meant to tax miscellaneous income. Common examples of this are reinsurance commissions (as distinct from premiums) and unfranked (taxable) income from collective investments.
This also brings in amounts brought under the minimum profits test - which we will come onto later
Step 4: LR non trading deficit
This step is when we bring in net debits arising from loan relationships and derivative contracts.
If you remember from step 1, we did not include any excess debits, this is because these are brought into this step of the I-E computation. We can only bring the total of the computation to nil at this stage. Any excess will be classed as a BLAGAB LR non-trading deficit, which can be carried forward into future periods as management expenses.
Step 5: management expenses
There is a five step process when calculating the BLAGAB management expenses:
- Ordinary BLAGAB management expenses - this is the sum of maintenance and acquisition expenses for the period, less any non-deductible items
- Adjust for acquisition expenses for expenses incurred before 1 January 2023 - as similar with UTDDs, acquisition expenses were spread across 7 years, and therefore this step was used to add back 6/7ths of the current year acquisition expenses, before bringing 1/7th of the previous 6 years of acquisition expenses into tax. However on 1 Jan 2023 the legislation changed and now acquisition expenses are not required to be spread across 7 years, and therefore from 1 Jan 2023 we not long need to make the 6/7th adjustment for current year acquisition expenses. Life companies will continue to spread earlier years expenditure, meaning 1/7th of acquisition expenses not fully relieved from earlier periods will still be brought into tax.
- Add deemed BLAGAB management expenses - add in deemed management expenses, for example capital allowances, R&D relief etc
- Adjust for expenses reversed - include if any expenses have been reversed
- Bring in brought forward management expenses - bring in bf management expenses from the prior year
The whole amount is aggregated and treated as BLAGAB management expenses within the I-E computation.
Step 6: I-E profit
We then aggregate the previous steps to calculate the I-E profit.
If the overall I-E figure is positive, then this is ‘excess BLAGAB income (XSI) and this amount is subject to tax.
If negative then this is ‘excess BLAGAB expenses’ (XSE) and it is carried forward to the next period as BLAGAB management expenses.
Excess E
The following categories of losses may arise and should be treated as below:
Excess management expenses (XSE) - This can be offset against total taxable BLAGAB income and gains. Any excess is carried forward to the next period as management expenses and can be used to reduce any XSI in future periods.
Non trade loan relationship deficit - This can be offset against total taxable BLAGAB income and gains. Any excess is carried forward to the next period and re-characterised as brought forward management expenses.
Capital losses - This can be offset against BLAGAB gains. Any excess is carried forward as a capital loss to be offset against BLAGAB capital gains in future periods.
All are carried forward indefinitely. BLAGAB losses are also not subject to the normal corporate loss restriction rules.
rate of tax
The I-E result is taxed at the basic rate of income tax (20%). Policyholders are only liable directly for any higher rate tax liability which they are due to pay.
commercial aportionment
Earlier, we covered the different types of funds in a life insurer (such as unit linked). Typically each fund will have a different apportionment method, to bring the correct income into the tax computations, as they relate to BLAGAB or non BLAGAB products.
For unit linked funds, it should be possible to allocate income or expenses to the underlying BLAGAB or non-BLAGAB policies based on the customer pricing methodology (an ‘actual basis of apportionment’).
For non-linked funds, there is no direct link therefore we need to agree with HMRC how to allocate. Generally we look at reserves to determine what proportion of assets or liabilities relate to BLAGAB and multiply this proportion by the income or expenses.
Apportionments between BLAGAB and non-BLAGAB should be made using an ‘acceptable commercial methodology’. This should be consistent with how the business is being managed and the approach agreed with HMRC.
We see a multitude of approaches being adopted/agreed with HMRC, from accounting mean liabilities/net reserves (by sub fund) to (increasingly) Solvency II liabilities. Additionally, WP asset shares (essentially an actuarial apportionment used to determine bonuses for customers) are commonly used to allocate amounts for WP funds.
