Revenue Note for Guidance
The Finance Act 2000 introduced a new regime for taxing life assurance companies and their policyholders. In general terms, and in respect of profits from life policies commenced on or after 1 January 2001, the new regime charges life assurance companies to tax under Case I of Schedule D. Profits from policies commenced before that date continue to be taxed on the I–E basis which in effect taxes both the company and its policyholder. There are special provisions for mutual life assurance companies (which cannot be taxed under Case I) whereby 5 per cent of the company’s increase in its policyholders’ funds in an accounting period will be deemed to be its profit and will be liable to corporation tax. A similar amount will be allowed as loss relief should the mutual life assurance company record a drop in its policyholders’ funds during in accounting period.
(1) For this Chapter and Chapter 5 of this Part the following definitions apply—
“assurance company” means an assurance company chargeable to corporation tax.
For an assurance company which was carrying on domestic life assurance business on 1 April 2000, “new basis business” means —
For an assurance company which was carrying on foreign life assurance business only (i.e. an IFSC life assurance company) on 1 April 2000, “new basis business” is all policies and contracts commenced on or after 1 January 2001.
For an assurance company which was not carrying on life assurance business on 1 April 2000, “new basis business”, subject to subsection (2), is all policies and contracts commenced from the time it began to carry on life business.
(2) An assurance company, which commenced life assurance business after 1 April 2000 and before 31 December 2000, can elect that life policies (other than pension and general annuity business) commenced up to 1 January 2001, not be treated as “new basis business”.
(3) & (4) “New basis business” of an assurance company in so far as it relates to life business, is to be treated for the purposes of the Corporation Tax Acts as separate from any other business carried on by the assurance company. The profits of “new basis business” are, subject to subsection (5), to be computed and charged to corporation tax under the provisions of Case I of Schedule D.
(5)(a) & (5)(b) In computing the “new basis business” Case I profits of an assurance company, profits which belong to or are allocated to or expended on behalf of policyholders are to be excluded; but profits reserved for policyholders are to be included.
(5)(c) A deduction or credit is not available in respect of any foreign tax suffered on income that forms part of its ‘policy holder business’ which is not chargeable to Corporation Tax in the hands of the life assurance company under subsection 5)(a).
(6) An assurance company suffering a loss in respect of “new basis business” may offset such loss against shareholder profits (i.e. the company’s profits of other life business) computed under Case I of Schedule D and section 710, i.e. losses under “new business basis” cannot be offset against profits of policyholders who continue to be effectively taxed under the old I–E regime.
(7)(b) & (7)(c) For each accounting period of a mutual life assurance company, 5 per cent of the increase in the company’s unallocated funds will be treated as annual profits or gains and that amount will be chargeable to corporation tax under Case III of Schedule D. Should a company record a decrease in these unallocated funds for an accounting period, an amount equal to 5 per cent of the loss will be allowed as relief against the profits of a previous or subsequent accounting period to the extent that the value of those funds do not fall below their value as at 31 December 2000.
(8) The method of calculating the increase or decrease in unallocated funds for both domestic and overseas life assurance companies is provided for.
Relevant Date: Finance Act 2021