Proprietary life insurers Flashcards
Proprietary life insurers
Mutual and proprietary life insurers both have to complete an I-E computation for BLAGAB business. For mutuals that is how they are entirely taxed. However since proprietary companies have shareholders, there needs to be a form of tax that must be paid on behalf of shareholder profits as well as tax on policyholders.
Shareholders are taxed on trading profits similar to normal corporate businesses, but with some life tax adjustments that we need to consider and the interaction between I-E and trading profits.
For Non-BLAGAB business, shareholder profits on a trading basis are the only basis of tax, as we do not collect policyholder tax for these policies. The trade profits calculation is used for the calculation of BLAGAB trade profit and non BLAGAB trade profit.
Trade profits comp
E.g. start from PBT per accounts (split between BLAGAB and non-BLAGAB) and make tax adjustments.
Split between BLAGAB and non-BLAGAB must be consistent with commercial allocations used for I-E and agreed with company’s CRM.
trade profits comp - life aspects
For the trading profits computation the starting point will be the PBT per the entity accounts (can be either UK GAAP or IFRS) and then specific life insurance specific adjustments will be made:
Common adjustments include:
Old and New DAC / DIR:
This is deferred acquisition costs. It describes the up-front cost of acquiring new business and is recorded in the accounts and amortised over the life of the business.
This should not be confused with deferred acquisition expenses which we saw as a tax adjustment as part of the I-E computation (due to the 7 year spreading rule). These are both amounts recognised in the accounts - deferred expenses and income amounts respectively.
Old DAC and DIR amounts are amounts that were originally capitalised in the accounts prior to 2013. Under the ‘old’ tax rules, these amounts were relieved/taxed up-front irrespective of capitalisation in the accounts. Therefore we need to disallow amortisation of these ‘Old’ DAC and DIR amounts as they were already deducted in prior years. We will still allow amortisation of “New” DAC.
Transitional adjustments & spreading
Transitional adjustments crystallised for tax purposes when the new life tax rules came into effect in 2013. In essence, the transitional amount brought into tax represented the difference between the two bases of tax, being reserves (mainly) calculated on the old PRA return basis and statutory accounts under the post 2013 (‘new’) regime. These transitional adjustments from 2013 are specifically spread over 10 years are expected to be fully extinguished in 2022.
Where a life insurer adopts IFRS 17 as its statutory accounting basis for insurance contracts, a transitional amount will be crystallised representing the difference between the bases of tax under IFRS 17 compared to the old accounting standard of IFRS 4 (or UK GAAP). For Life Insurers, this adjustment is also specifically spread over 10 years.
Policyholder tax deduction
See next slides
Policyholder tax deduction
The policyholder tax deduction is a specific life tax adjustment which gives a deduction in the BLAGAB trade profit calculation for tax paid (or expected to be paid) on the policyholder element of the insurer’s business. The deduction is the sum of the policyholder current and deferred tax charges for the period.
Current tax: Tax charged at the policyholders’ rate on the policyholders’ share of the I-E profit (i.e. tax payable at 20%). This calculation flows directly from the I-E tax computation for the period and the policyholder share of this amount
Deferred tax: This adjustment is the net movement in policyholder deferred tax balances for the period (the closing deferred policyholder tax balance for the current period less the closing deferred policyholder balance for the previous period).
If the movement is negative (a charge), a tax deduction is available. If it’s positive (a credit), this is taxed.
relief for BLAGAB trade losses
BLAGAB trade losses can be relieved in many ways, the reliefs below are similar to loss reliefs of a normal corporate business. Losses cannot be used against the policyholder share of the I-E computation however.
Section 37 of CTA 2010 (relief for trade losses against total profits) applies to a BLAGAB trade loss – this allows relief against:
non-BLAGAB long term business trade profits;
any general insurance business trade profits; and
any non-insurance business income, profits or gains (including taxable income or gains from long-term fixed capital assets).
The loss not surrendered under section 37 of CTA 2010 is carried forward and used to reduce the BLAGAB trade profit for subsequent periods for the purposes of:
section 93 (minimum profits); and
section 104 (policyholders’ rate of tax)
The carried forward loss is after any group relief surrenders. There is no need for a claim for carry-forward and the offset is automatic under sections 93 and 104. Where carried forward, the losses are not subject to the 50% restriction as with other trading losses.
In most cases, BLAGAB trade losses are then carried forward to be offset against future BLAGAB trade profits.
Summary
In summary:
Trading profits computation will appear more like the tax computation of a normal trading company.
There are a number of specific life insurance tax adjustment - policyholder tax deduction for example
The BLAGAB/Non-BLAGAB profit split is allocated on a commercial basis.
Loss relief provisions are similar to existing provisions, but BLAGAB trade losses will only ever attract marginal rate relief.
