EXPLANATORY NOTE
(This note is not part of the Regulations)
Section 57 of the Finance Act 2012 (c. 14) (“FA 2012”) defines basic life assurance and general annuity business (“BLAGAB”) as life assurance business other than specific categories of business listed in section 57(2). The Regulations provide for the cases in which reinsurance of life assurance business is within BLAGAB.
The Regulations also set out which reinsurance arrangements are not within the scope of the BLAGAB imputed investment return charge under section 90 of FA 2012 and specify the amount to be treated as BLAGAB income where a charge under section 90 of FA 2012 applies.
The Regulations amend the Insurance Companies (Taxation of Re-insurance Business) Regulations 1995 (S.I. 1995/1370) such that those Regulations do not apply in respect of any re-insurance arrangement which is entered into on or after 1st June 2018.
Regulations 4, 5 and 6 define the types of reinsurance of life assurance business that fall to be taxed under the BLAGAB rules on the re-insurer.
Regulation 4 states that regulations 5 and 6 describe the types of business which are excluded business for the purposes of section 57 of and are therefore within the definition of BLAGAB.
By regulation 5, reinsurance of life assurance business is BLAGAB where the investment risk of BLAGAB of a UK tax-resident cedant is re-insured intra-group and where both the cedant and re-insurer are within the charge to UK tax. However, where the cedant is charged to UK tax on the investment return from the assets backing the business re-insured, the business is not BLAGAB in the hands of the re-insurer.
By regulation 6, reinsurance of life assurance business is BLAGAB where the cedant is not subject to UK tax in respect of the business re-insured and the underlying policy liabilities are determined by reference to matched assets which are wholly or substantially UK land and property.
Regulations 7 to 11 provide exclusions from the need to impute investment return to the cedant in respect of a reinsurance arrangement.
Regulation 7 states that, except where a reinsurance arrangement is entered into with a main purpose of reducing the amount charged to tax as BLAGAB income (see regulation 13), regulations 8 to 11 prescribe the types of business excluded from the imputation of income under section 90 of FA 2012.
Regulation 8 provides that no imputation of income to the cedant is required for UK intra-group reinsurance within regulation 5, where either the re-insurer or the cedant is already charged to tax on the related investment income.
Regulation 9 provides that no imputation of income to the cedant is required where the re-insurer is not within the charge to corporation tax in the UK but is chargeable to tax under the laws of another EEA state on a basis equivalent to the UK BLAGAB rules at a rate no less than the policyholder’s rate of tax.
Regulation 10 provides that no imputation of income to the cedant is required where the reinsurance arrangement only relates to risks that do not include any investment return risk.
Regulation 11 provides that there is no imputation of income to the cedant where the policies re-insured are protection business (see section 62 of FA 2012) entered into before 1st January 2013 or immediate needs annuities.
Regulation 12 provides that for the purposes of section 90(4) of FA 2012, the amount of income treated as accruing to the cedant is to be calculated in accordance with the Schedule to the Regulations, except where the reinsurance arrangement includes negligible amounts of BLAGAB compared to the total re-insured or where the cedant is not within BLAGAB due to the small amount of BLAGAB within its long-term business (see section 67 of FA 2012).
Regulation 13 provides that where arrangements are entered into to reduce the amount of chargeable BLAGAB profit then the income treated as accruing to the cedant is to be calculated in accordance with the Schedule to the Regulations.
Regulation 14 provides for continuity of treatment under the imputation provisions where there is an insurance business transfer scheme of the business of the cedant.
Regulation 15 provides that the Insurance Companies (Taxation of Re-insurance Business) Regulations 1995 cease to apply to arrangements entered into on or after 1st June 2018.
The Schedule provides the method of calculating the amount of the investment return income to be imputed under section 90(4) of FA 2012.
For continuing policies or contracts, the amount imputed is by reference to a formula, providing a return equivalent to UK 5 year gilts +4%. Where the policy or contract ends in the accounting period or the reinsurance arrangement comes to an end, the amount imputed depends on whether or not the cedant is able to provide evidence of the amount of the investment return that would have been chargeable had the re-insurance not occurred. If the evidence can be provided, a reconciling figure is taken into account, so that the amount imputed over the life of the arrangement is the amount that would have been charged had the arrangement not occurred. Otherwise, the amount imputed in the final accounting period is by reference to UK 5 year gilts +4%.
A Tax Information and Impact Note covering this instrument will be published on the HMRC website at https://www.gov.uk/government/collections/tax-information-and-impact-notes-tiins.