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LAM01130 | Introduction and long-term insurance business overview: key concepts: a simplified overview: FA12/S55

From HM Revenue & Customs · Life Assurance Manual

For tax purposes, a life company is carrying on a trade. The long-term business trade profits must be split into two separate businesses for tax purposes (FA12/S66):

  • relating to products where the investment return to policyholders is to be taxed under the I-E regime (BLAGAB) as a separate business

  • all other profits (non-BLAGAB) taxed as a single trade

In addition, the company must determine which part of income, gains and expenses must be allocated to BLAGAB and brought into the I-E profit computation.

A life company may have ‘Long-term Business Fixed Capital’ (LTBFC) under the transition from the pre 2013 life tax regime and/or structural assets such as subsidiaries, which are not part of the trading activity. LAM11000.

A small number of life companies also write general insurance business with ‘composite’ licences. Such licences are no longer granted to direct insurers. In these cases the accounts often separate out the general insurance business so apportionments are not necessary. The general insurance or ‘short-term’ business will be a separate trade for tax purposes FA12/S66.

The split of the life company into these elements can be illustrated as follows, with the definitions of the types of long-term business for tax purposes set out in LAM01140

Apportionments have to be made between BLAGAB and non-BLAGAB for both trade profit calculations and for calculation of BLAGAB investment income, gains and expenses. LAM05000

Given the regulatory prohibition on insurance companies engaging in any non-insurance related activities, any substantive activity outside the insurance trade, other than holding subsidiary companies and investments in associated companies and joint venture entities is unlikely- see PRA Rulebook Conditions Governing Business rule 9. This prohibition means that insurance groups will often set up separate service and/ or employment companies to ensure compliance with this rule. Regulatory restrictions may in some circumstances result in recharges at cost. This is further explained in LAM12200.