SolvedLAM03030 | Calculation of ‘I’ Income and chargeable gains: FA12/S73 Step 1: What is included as income: FA12/S74
From HM Revenue & Customs · Life Assurance Manual
I-E taxation involves taxing the company on its investment return less expenses.
‘Income’ is defined for the purposes of the I-E calculation in FA12/S74.
Income includes the income or credits listed below and in the table in so far as they arise from the company’s long-term business referable to BLAGAB. These are income or credits that, but for inclusion in the I-E profit in FA12/S68 (and exclusion from S35 charge FA12/S69), would have been brought into account or chargeable under another provision (FA12/S74(5). However, income arising from an asset forming part of the long-term business fixed capital (LAM11000) of the company is disregarded (FA12/S74(6)).
A significant proportion of taxable income will often come from loan relationships and to a lesser extent from income from land.
Rents and other receipts relating to land, FA12/S74(1)(a) UK and overseas land and property Income
Income from a UK or overseas property business chargeable under
CTA09/PART4/CHAPTER3 less expenses (including capital allowances).
Includes income chargeable in respect of distributions treated by CTA10/S548(5) as profits of a UK property business.
FA12/S86 modifies the property income rules in CTA09/PART4/CHAPTER3 to allow the application of I-E rules and provides for a life insurance company to have more than one property business. See LAM03080
Interest, profit on sales of debt assets, profits on derivative contracts.
Interest, profit on sales of debt asset, profits on derivative contracts. FA12/S74(1)(b) Loan Relationship credits and FA12/S74(1)(c) credits in respect of derivative contracts
Loan relationships credits under CTA09/PART5 and derivative contract credits under CTA09/PART7 as applied and modified by FA12/S88.
FA12/S88 ensures that for the purposes of the I-E calculation the loan relationship rules apply as though the BLAGAB business were not a trade. S88 further provides that only a net BLAGAB credit should be taken into account as income. S88 (4) includes credits in respect of derivative contracts together with loan relationships for the purposes of I-E income.
Deficits on loan relationships and derivative contract debits (step 4 reduction) are dealt with at FA12/S73 and discussed in LAM03060.
Other types of income included in the S74 definition are as follows:
| Income type in FA12 | Tax treatment |
|---|---|
| Royalties and gains on intangible fixed assets. S74(1)(d) Intangible fixed asset credits | Credits brought into account under CTA09/Part8 as modified by FA12/S88. S88 ensures that for the purposes of I-E calculations the intangible fixed asset rules apply as though the BLAGAB business were not a trade. S88 further provides that only a net BLAGAB credit should be taken into account as income. For intangible fixed asset debits see LAM03060 |
| Dividends or other distributions S74(1)(e) taxable distributions | Any dividend or other distribution chargeable under CTA09/PART9A – Company Distributions (unlikely to occur other than exceptionally) |
| Sale of foreign dividend coupons S74(1)(g) | Income chargeable under CTA09/PART10/CHAPTER6 |
| Unfranked distributions Annual payments not otherwise charged S74(1)(h) | Unfranked distributions from authorised unit trusts and OEICs chargeable under CTA09/PART10/CHAPTER7 |
| Overseas income not otherwise charged S74(1)(i) | Income arising from a source outside the UK which is chargeable under CTA09/PART10/CHAPTER8 |
| Miscellaneous income S74(1)(j) | Income chargeable under any provision to which CTA10/S1173 miscellaneous charges applies other than CTA09/S752 (non-trading gains on intangible fixed assets) LAM03090 |
| Distributions from Unauthorised Unit Trusts S74(1)(k) | Income chargeable under Regulation 15 of SI2013/2819 The Unauthorised Unit Trusts (Tax) Regulations 2013. |
Distributions arising from equities, unit trusts and OEICs are the other significant sources of income but, with some exceptions - such as those falling within S74(1)(h) , these distributions are not taxable income in the BLAGAB I-E computation.
In practice, it will be necessary to analyse all sources of income and decide which category applies, to ensure the correct treatment. In most cases this will be straightforward but, as life companies have extensive investment portfolios and regular turnover of investments, there can be many sources of income to consider within the rules. Income (other than premium income and amounts received under reinsurance contracts) that is not covered in the other provisions above or in the chargeable gains section should be considered as to whether it is taxable under FA12/S92 or as miscellaneous income under FA12/S74(1)(j) LAM03090.