Life - Articles - Life insurance companies: a new corporate tax regime

     

  

 Solvency II (SII) necessitates change to the UK’s life tax regime. Key elements of the tax calculations are based on the annual FSA return, including use of the revenue and surplus statements to calculate life assurance trading profit (old Notional Case I), and the gross-roll up profit computations. Many believed that SII would be the catalyst for abolition of the UK’s I minus E regime and a move to gross roll-up.  But it became clear that the I minus E regime could be retained albeit that the accounting basis for the profit computations must change.

  

 A key decision on 23 March was that the profit computations will be based on statutory accounts profit.  This severed SII from the life tax consultation.  SII will not form the basis for taxation.

  

 The tax implications of moving from Solvency I to accounts basis are significant.  Regulatory concepts such as investment reserves, Form 58 surplus, and contingent loans have defined a generation of life tax, spawned legislation and case law, and caused FDs and judges alike to scratch their heads and describe obtaining an understanding of the regime as like climbing up a very steep hill!  Also, we are also moving to an uncertain accounting basis – from 1 July 2013 UK GAAP is to be replaced with IFRS (and IFRS4 Phase II approaches).  The move requires a potentially very material step change in basis (think asset valuation and accounting differences).  The proposal is to disallow amortisation of deferred acquisition costs at transition and to spread other transitional differences over 10 years except for a possible limited extension for Court Schemes. 

  

 The Government is also undertaking simplification and modernisation where possible, and proposes to add the current gross-roll up category (principally pension business and overseas life business) to PHI and new Protection as a single trading category from 1 January 2013.  Losses at transition will be available for offset against the profits of the new category subject to possible restrictions such as streaming.  This change isolates BLAGAB I minus E business as investment business and historic Protection, and simplifies the regime so that apportionment rules now need to identify only BLAGAB I minus E and BLAGAB life assurance trade profit, with the balance falling into the super-category.  The elegance of this solution is that it works equally well whether savings products maintain their volumes or whether they decline as many predict.  The solution protects the tax position of the back book and also Exchequer revenues. 

  

 A further important decision published on 23 March 2011 was the announcement that the Government would legislate to treat new Protection policies written on or after 1 January 2013 as outside I minus E.  The change has no impact on the existing Protection book written prior to that date, or relief brought forward or spread forward in respect of business prior to that date. This should encourage greater competition in the market as the ability to compete will not rely on having a large book of investment business.

  

 Other decisions were also made subject to detailed consultation.  I have emphasised the following important aspects:

  

 UDS/FFA for with profits business will be deductible.  With-profits offices will be watching whether IFRS 4 Phase II   will have an equivalent.

  

 Policyholder bonuses and policyholder tax will be deductible – the calculation methodology for the latter is a material outstanding.

  

 The apportionment rules will follow a “factual commercial basis” with a statutory rule where this is not feasible or appropriate.  Actuaries and tax teams should engage to understand this.

  

 The long-term fund and shareholder fund divide may disappear at SII (even if some companies may be required as a legal matter to continue to maintain this). The tax rules may cater for a split by determining whether assets are fixed or circulating capital.

  

 Engagement has been excellent between the industry and HMRC and HMT, supported by the industry bodies and advisers.  But it is clear that there will be a very significant level of resource required to deliver legislation for very major change which must be implemented from 1 January 2013. Companies should understand and support this.