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Capital Allowances Act 2001

Sections 254 to 257: Life assurance business

888.These four sections give effect to allowances for management assets of companies carrying on life assurance business. They are based mainly on section 434D of ICTA. “Management assets” are defined by section 544.

889.The background to the sections is, in summary, that the taxation of life assurance business is complex. It is a trade the profits of which could, and in certain cases must, be charged to tax under Case I of Schedule D. But a company carrying on life assurance business can also be taxed on the investment income of the company, plus capital gains on the investments, with relief given for the company’s management expenses. This latter method is known as the “income less expenses” (I‑E) basis of assessment.

890.If the I‑E basis is chosen, a separate computation must be prepared for each category of life assurance business. The I‑E basis itself applies to the income and gains of a company that are referable to its basic life assurance and general annuity business (BLAGAB). Where a company also carries on other categories of life assurance business, it is taxed on the profits of those categories, calculated in the same way as the profits of a trade are calculated, but charged under Case VI of Schedule D. This requirement for separate computations means that allowances have to be identified with each category of business. Section 255 does this. It provides for allowances and charges to be apportioned between categories of business:

  • subsection (1) sets out the basic apportionment formula to be applied, subject to the special rule for overseas life assurance business in subsection (3);

  • subsection (2) modifies the application of the formula to an overseas life insurance company; and

  • subsection (3) provides that allowances on assets provided outside the United Kingdom for use in the management of an overseas life assurance business must be allocated to that business.

891.Section 256 then gives effect to allowances and charges:

  • for BLAGAB, subsections (2) and (3) treat allowances as management expenses and charges as income taxable under Case VI of Schedule D;

  • for pension, ISA, life reinsurance and overseas life assurance business, subsections (3) and (4) treat allowances and charges as expenses or receipts of that business.

892.Section 257 deals with various supplementary matters:

  • subsection (1) ensures that allowances on “management assets” are only given effect in accordance with the special rules in the preceding sections;

  • subsection (2) preserves the availability of allowances in “notional” computations under Case I of Schedule D, which may have to be prepared even if I-E is chosen as the basis on which tax is charged; and

  • subsection (3) ensures that the various expressions used in the preceding sections continue to have the same meaning as in the main body of legislation dealing with the taxation of life assurance companies in Chapter I of Part XII of ICTA.

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