Revenue Note for Guidance

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Revenue Note for Guidance

719 Deemed disposal and reacquisition of certain assets

Summary

The assets of an assurance company’s life business are, subject to certain exceptions, deemed to be disposed of and reacquired at market value at the end of each accounting period of the company. The resulting net gain or loss is spread over 7 years under section 720.

Details

(1) Certain definitions are provided for the purposes of sections 719 and 720.

(2) In general, each asset of the life business fund (that is, the fund or funds maintained in respect of its life business) of an assurance company is deemed to have been disposed of and immediately reacquired at the end of each accounting period at the asset’s market value at that time.

This deemed disposal and reacquisition does not apply to —

  • assets to which section 607 applies (that is, Irish Government and certain other securities) except, with effect from 26 March 1997, such assets held under a swap arrangement,
  • assets which are strips within the meaning of section 55,
  • assets linked solely to pension business or special investment business, or
  • assets of the foreign life assurance fund.

(3) Where assets are not linked solely to life assurance business (other than pension business and general annuity business) the deemed disposal and reacquisition applies to a fraction of each category of asset, as determined by subsections (4) and (5).

(4)(a) The apportionment of assets is made in proportion to the liabilities and investment reserves attributable to the difficult categories of business. Provision is made for the apportionment of linked assets and assets other than linked assets. The apportionment of assets other than linked assets involves the apportionment of investment reserves of with-profits business and other business. In the fraction (that is, the relevant chargeable fraction) of linked assets to be attributed to core life business the denominator is essentially an average of the company’s liabilities in relation to the linked assets – other than assets linked solely to core life assurance business or linked solely to pension business and other than assets of the foreign life assurance fund. The numerator is essentially an average of the liabilities included in the denominator which are attributable to the core life assurance business.

In the fraction (the relevant chargeable fraction) of assets other than linked assets to be attributed to core life business, the denominator is essentially the sum of an average of the company’s liabilities, other than those related to linked assets and foreign life assurance business, and the average investment reserve. The numerator is the sum of those parts of the 2 components of the denominator which are attributable to core life business (that is, the appropriate part).

(4)(b), (5) The appropriate part in relation to the investment reserve means —

  • where none, or only an insignificant proportion, of the liabilities of the life business are with-profits liabilities, the part of the reserve which bears the same proportion to the whole as the non-linked liabilities of the business not charged to tax under Case I or Case IV of Schedule D bears to all the non-linked liabilities of the business, and
  • in any other case, the part of the reserve which bears to the whole the same proportion as the amount of the with-profits liabilities of business, the profits of which are not charged to tax under Case I or Case IV of Schedule D, bears to the whole amount of the with-profits liabilities of the life business.

(6) Deeming only the “relevant chargeable fraction” of assets partly related to the basic life assurance business of a company to have been disposed of and reacquired necessitates a part disposal computation of the assets in question. If unrealised gains and losses were computed on a part disposal basis over a number of years, the normal apportionment of costs of acquisition would result in an overcharge. To prevent this, in computing a gain or loss on the deemed disposal and reacquisition of assets on the last day of an accounting period, assets not linked solely to basic life assurance business (including pension business or general annuity business) are deemed to have been acquired at their respective market values on the day immediately before the day on which that period began.

Example

Deemed disposal

No deemed disposal

Year 1

60% of asset

40% of asset

Cost of asset

1,000

600

400

Market value on deemed disposal

2,000

1,200

800

Gain (ignoring indexation)

600

Year 2

Cost of asset

1,200 + 400

x 60% = 960

x 40% = 640

Market value of deemed disposal

1,200

800

(unchanged from Year 1)

Gain

240

Subsection (6) will produce the following result in Year 2 —

Cost of asset

1,200 + 800

x 60% = 1,200

x 40% = 800

Market value of deemed disposal

1,200

(unchanged from Year 1)

Gain

Nil

(7) In determining the investment reserve, assets and liabilities of the foreign life assurance fund.

Relevant Date: Finance Act 2018