711 Chargeable gains of life business

Summary

This section makes adjustments to the capital gains tax provisions for the purpose of their application to chargeable gains accruing to a fund or funds maintained by an assurance company in respect of its life business. One of the purposes of the section is to ensure that chargeable gains accruing to such funds are taxed at the standard rate of income tax.

Details

(1)(a)&(b) In computing the chargeable gains accruing to life business funds neither the indexation provisions of section 556 nor the exemption of government and certain other securities, under section 607, apply. Under section 581, where a person disposes of shares or securities that were acquired within 4 weeks of the disposal, the shares disposed of are identified with the shares acquired within those 4 weeks (the “4 week” rule). Furthermore, a loss generated by a disposal of shares or securities, where the shares or securities are reacquired within 4 weeks, can only be set off against any chargeable gain arising on the disposal of the reacquired shares or securities. These provisions are relaxed in the case of chargeable gains of life business in that in applying the provisions, gilts are treated as continuing to be exempt from capital gains tax and the annual deemed disposal and reacquisition provisions of section 719 are ignored in respect of them. Where the 4 week rule applies to an actual (not deemed) disposal and reacquisition, and the reacquired shares recover in value and give rise to a chargeable gain on a deemed disposal and reacquisition, the deemed gain may absorb the loss of the previous actual disposal.

(1)(c) The amount of capital gains tax computed for the purposes of section 78(2) is the amount computed as if, notwithstanding section 28(3), the rate of capital gains tax were —

• 40 per cent throughout the financial year 1999 (but subject to paragraph (d)), and
• throughout each subsequent financial year the rate of corporation tax specified in section 21(1) for that financial year e.g. 16 per cent for the financial year 2002 and 12 per cent for the financial year 2003 and each subsequent financial year.

(1)(d) Where, for an accounting period, the expenses of management (within the meaning of section 83 as applied by section 707) deductible exceeds the amount of profits from which they are deductible, 28 per cent is substituted for 40 per cent in paragraph (c)(i) for the financial year 1999.

(2) If securities are acquired by a company for its life business fund “cum-div” (that is, the company is entitled to the next interest payment) and they are then sold “ex-div” (that is, the company retains the right to the next interest payment) then the company will have realised a capital loss on the disposal and at a later date will receive a corresponding amount of interest. If the accounting date of the company falls between the date of the disposal of the security and the date of receipt of the interest the company would obtain a tax advantage. However, this tax advantage is negated by the requirement that any such loss is to be only allowed for tax purposes in the accounting period in which the interest is received.

(3) Where a life assurance company in the course of its special investment business or basic life assurance business has net allowable losses on its disposal or deemed disposal of investments in an accounting period, the net loss can be set off against the investment income of those businesses. This is effected by treating the losses as management expenses of the accounting period.

(4) However, before calculating what capital loss is to be assimilated into management expenses, regard must be had to the spreading provisions of section 720. In computing an overall net loss of an accounting period the following are taken into account —

• gains and losses on actual disposals of the period,
• one-seventh of the net unrealised gain or loss accruing in the period, and
• one-seventh of the net unrealised gain or loss of each of the previous periods which are spread forward into the current period.

Relevant Date: Finance Act 2021