HMRC is running a month-long consultation seeking views on the draft regulations for the tax treatment of re-insurance arrangements, which will be of interest to life insurance companies and reinsurers who are party to reinsurance arrangements involving reinsurance of basic life assurance and general annuity business (BLAGAB)
The Finance Act 2012 introduced a new regime for taxing basic life assurance and general annuity business (BLAGAB) of life insurance companies.
Specific anti-avoidance rules are required for re-insurance arrangements of BLAGAB to ensure the tax on investment returns from assets backing life insurance policies remains within the special tax regime. Regulations define the scope of the charge and provide the method for calculating investment returns.
The rules for taxing BLAGAB of a life insurance company seek to tax both the company’s profits from writing life insurance business and the policyholder’s investment return. The rules include provisions to prevent the life insurance company reinsuring its BLAGAB with a reinsurance company (not generally within BLAGAB) and avoiding the tax on the policyholder’s investment return.
Where a life insurance company (‘the cedant’) enters into arrangements to reinsure BLAGAB the rules provide for imputation of an investment return to the cedant in circumstances provided for in regulations.
The draft measure brings in regulations to define when a reinsurer’s business will be taxed as BLAGAB; when imputation applies to the cedant; and how the investment return is to be calculated where imputation applies.
The new regulations recognise that in the majority of reinsurance arrangements the assets backing the policyholder liabilities remain with the cedant. This means that the cedant will include the actual investment return on those assets within its BLAGAB profit. The new regulations remove the need to impute an investment return in these circumstances.
The reinsurer, if chargeable to tax in the UK, would also not have to impute an investment return if the cedant is being charged on the investment return.
The new regulations also provide a revised formula to compute the investment return to be imputed for other BLAGAB reinsurance arrangements. Additionally where policies cease, or the reinsurance arrangement ends, the imputed amount for the final accounting period may be a reconciling figure to reflect the actual investment return over the life of the policy. This will be the case where the cedant is able to produce evidence of the amount of investment return that would have been chargeable had the reinsurance arrangement not occurred.
These new regulations replace the previous regulations, Insurance Companies (Taxation of Reinsurance Business) Regulations 1995 (SI1995/1370), with rules that reflect modern commercial practice. The new regulations will enable commercial reinsurance of BLAGAB to take place while ensuring that UK tax on the policyholder’s investment return is still paid on an appropriate basis.
The consultation closes on 28 March.
Draft regulations: The Insurance Companies (Taxation of Re-insurance Business) Regulations 2018 are here.
Report by Pat Sweet
