Introduction Background Note
15.Currently the tax treatment of additions made by a company to its long term insurance fund (LTIF) is governed by a combination of case law and an unpublished concession in guidance. A company may add capital to its LTIF for regulatory or commercial reasons but in certain circumstances amounts are added with the intention of obtaining a tax advantage.
16.The impact of the existing case law and concession is uncertain for both HMRC and the industry. The legislation attempts to remove that uncertainty by providing that the default position for such capital additions is that they are not taxable. It then identifies a number of sets of circumstances where such an addition has been made where reliefs shall be restricted. At the same time the opportunity has been taken to apply consistent treatment to the allowance of “capital” bonuses paid to policyholders – whether those bonuses are funded from a non-taxable capital addition or some other untaxed source.
17.The income and gains of a company’s life insurance business are taxed as they are brought into account in the company’s regulatory return to the Financial Services Authority (FSA). In general terms the measure seeks to restrict relief when tax-deductible expenditure is incurred but this is not matched by the bringing into account of a corresponding amount of taxable income. Circumstances in which this may occur, are set out in the following three examples, which correspond to the restrictions to relief found in new section 434AZA and the new subsection (2A) of section 82 of FA 1989.