Categorisation of long-term insurance business for corporation tax purposes in the United Kingdom

For corporation tax purposes in the United Kingdom, long-term insurance business is divided into different categories. The reason for this is that each category of business is given a different tax treatment. The categorisation is currently set out in sections 333B, and 431B to 431F of the Income and Corporation Taxes Act 1988 (ICTA).

Categorisation

Life and non-life

The first basic categorisation of long-term insurance business is between life and non-life business. Life insurance business is insurance that is contingent on human life. Examples would include a policy that pays out £100,000 if the policy holder dies within a specified time; a policy that pays out £100,000 in 10 years time, but will pay out £101,000 if the policy holder dies before the policy matures; a pension in payment, which will end once the pensioner dies.

The main example of non-life long-term insurance business is permanent health insurance, but the category includes pensions management. Capital redemption business, which is business written for a premium in exchange for a payment of an annuity over a period of, say, 99 years, is also long-term non-life business. However, for taxation purposes, only capital redemption business written before 1 January 1938 is treated as non-life assurance business.

Basic life assurance and general annuity business (section 431F ICTA)

Basic life assurance and general annuity business is defined as being life assurance business not fitting within any other category of business. It is often abbreviated to BLAGAB. BLAGAB is taxed on the so called I minus E basis (ie the company is taxed on its investment return minus its expenses of management). The I minus E basis raises the UK Exchequer more revenue than it would get if it were taxed on a trading basis. This is because a trading computation would tax Premiums plus Investment return minus Expenses minus Claims, and the expectation is that policy holder claims will be greater than the premiums they pay, as policy holders tend to hold life assurance policies as an investment that they hope will grow. To ensure the Exchequer does not lose out in a year where a trading basis would yield greater tax revenues, E (expenses of management) is restricted so the I minus E cannot be lower than the measure of trading profits, with any restricted E being carried forward and deemed to be E of the subsequent period.

Before 1 January 1992, there were separate tax computations for basic life assurance business and for general annuity business, since then the two categories have been combined into BLAGAB.

Capital redemption business written since 31 December 1937 has been treated as though it were BLAGAB from the first accounting period of a company ending on or after 1 July 1999. Before then, it was treated as a separate business taxed on an I minus E basis.

Pension business (section 431B ICTA)

The concept of "pension business" was introduced in the Finance Act 1956, which introduced it as a tax-advantaged way of saving for retirement. The tax advantage comes through taxing it on a trading profit basis rather than on an I minus E basis. The precise definition of what it constitutes is closely defined by statute so that only schemes approved by the Government qualify for the tax advantages. Pension business includes business relating both to the accrual of pension benefits whilst the policy holder is working and pensions in payment. Pension business includes reinsurance of pension business.

Life reinsurance business (section 431C ICTA)

Life reinsurance business is broadly just that: the reinsurance of life assurance business, but there are some exceptions. The concept of life reinsurance business was introduced in 1995 as part of an anti-avoidance measure. Companies writing basic life assurance and general annuity business were reinsuring their business with reinsurers, typically in Bermuda, but sometimes to another UK company or to another country that would not be taxed on its investment return. Later on they would receive reinsurance recoveries equal to the premiums the UK company paid plus investment return, minus the expenses and profits of the Bermudian reinsurer. The UK company would therefore have converted taxable investment return into a reinsurance recovery and would not be taxed on the reinsurance recovery.

The 1995 Finance Act changed the law to impose an imputed investment return on the UK company. In order to avoid double taxation, a UK company reinsuring this business needed to not be taxed on the same investment return again: therefore "life reinsurance business" was born. There are exemptions to the rules for UK companies within the same group with 90% common ownership, where the imputed investment return would be negligible or nil, and where the reinsurer is in the European Union and is taxed on a regime that produces a result equivalent to I minus E.