Budget: Tax measures for insurance businesses
Changes concern the taxation of reinsurance and court directed write downs of insurer’s liabilities (including annuities).
Reform of the taxation of reinsurance
In addition to the key Spring Budget measures covered elsewhere in this edition of Tax Matters Digest, the Chancellor has introduced some changes to legislation which will specifically impact insurance businesses. These concern the reinsurance of life insurance businesses and court directed write downs of insurer’s liabilities (including annuities).
Reinsurance of life insurance business
Reinsurance preceding a transfer of insurance business
This measure applies to certain types of non-pension business where a reinsurance arrangement is entered into prior to an expected future transfer of that business to the reinsurer (or a connected party). The measure creates a more consistent tax treatment for the business in question in the periods before, during and after the reinsurance arrangement. This should help avoid distortions in the calculation of trade profits and losses for tax purposes. These rules generally take effect from 15 December 2022 (but there are exceptions where there is early adoption of IFRS 17).
Amendment to Section 92 FA 2012
This measure applies where a life insurance company reinsures risks in connection with certain types of non-pension business. Where the reinsurer assumes substantially all the insurance risks relating to the business in question, any sums received from the reinsurer will no longer be included in the insurer’s taxable profit computed on an Income minus Expenses (I-E) basis. It will take effect for accounting periods ending on or after 15 December 2022.
This change is a very welcome development as there was uncertainty as to how the previous legislation applied to such transactions and there was scope for double taxation, as any commission received from the reinsurer may have been included in I-E profit. In particular, the new measure should allow companies to use reinsurance to, in effect, dispose of the relevant types of business without uncertainty over how the disposal proceeds are taxed.
Court-directed write down of liabilities (including annuities)
This measure addresses the pensions tax and corporation tax consequences of court directed write-downs under proposed new section 377A of the Financial Services and Markets Act 2000. It will only apply to insurers in financial distress. The write down will not give rise to a taxable trading receipt or a loan relationship credit for the insurer. FA 2004 will be amended to make clear that the reduction in the annuity will not prevent the definitions of lifetime annuity or dependents’ annuity being met. Annuitants who receive Financial Services Compensation Scheme (FSCS) top up payments as a result of the write down will not face a tax disadvantage (as any subsequent FSCS top ups are to be considered authorised payments).