Background Note
6.There is currently a regulatory requirement for general insurance companies (but not members of Lloyd’s) to maintain equalisation reserves in respect of certain lines of business. From 1996, amounts transferred into equalisation reserves were made tax deductible and transfers out were treated as taxable receipts of the company’s business.
7.Section 47 FA 2009 provided a power to apply similar treatment to Lloyd’s corporate and partnership members. The power was used in 2009 to make regulations (The Lloyd’s Underwriters (Equalisation Reserves) (Tax) Regulations 2009 (SI 2009/2039)) to allow Lloyd’s corporate and partnership members to calculate and hold an equivalent reserve for tax purposes only. Therefore, as with general insurance companies, amounts transferred into an equivalent reserve were made tax deductible and transfers out were treated as taxable receipts of the member’s business.
8.The relief currently available to general insurance companies is dependent on the regulatory requirement for those companies to maintain equalisation reserves. As a result of the European Union Solvency II Directive that requirement will be withdrawn.
9.An informal consultation took place between April and August 2011 with an industry working group. Both the Association of British Insurers and Lloyd’s, representing general insurance companies and corporate and partnership members at Lloyd’s, have been included in the consultation process.
10.Taking into account these discussions, the Government has decided to repeal the legislation that allows tax relief for equalisation reserves. The Government has also decided to introduce a transitional period for the release of built-up reserves that involves spreading that release in equal instalments over a six year period commencing from the date that the Solvency II capital requirements come into force. Insurers may also elect to have the full remaining balance of the built-up reserve released to tax in any calendar year during the transitional period.
