SolvedLAM03040 | Calculation of ‘I’ Income and chargeable gains: Main sources of BLAGAB investment return – summarised tax treatment
From HM Revenue & Customs · Life Assurance Manual
The table below summarises the main sources of investment return which would be expected in a life insurance company, briefly refers to the basic BLAGAB tax treatment and links to the relevant part of this manual for further detail on the appropriate tax treatment for income and gains arising.
Simplified summary of main sources of BLAGAB income and gains
| Source of investment return | FA12/S73 Step 1 Income | FA12/S73 Step 2 chargeable gains |
|---|---|---|
| Debt securities and derivatives, intangible assets LAM03060 | Loan relationships (CTA09/PART5) and Derivative credits (CTA09/PART7) taxed and accounted for on a mark to market basis. Intangibles (CTA09/PART8). Rules applied as if BLAGAB is not trading or property business (FA12/S88) | Certain derivatives are subject to CGT rules, excluded from LR treatment due to underlying assets or specific anti-avoidance provisions LAM03070 |
| Equities LAM03200, Distributions, disposals , derivatives CFM55000 | Distributions exempt if they fall within an exempt category in CTA09/PART 9A | Disposals dealt with under the CGT regime and thus on a realisation basis. Derivatives broadly follow treatment of underlying equities |
| Land and property: LAM03080 Rent /other receipts Derivatives. | Separate property business taxed on profits FA12/S86 – see also Real Estate Investment Trusts ‘REITs’ below | Disposals dealt with under the CGT regime on a realisation basis. Derivatives follow treatment of underlying asset |
| Collective investment schemes and similar investments | More details below collective investment schemes may take various forms | |
| Authorised unit trusts (AUTs) and open ended investment companies (OEICs) (that are not bond funds) LAM03300 | AUTs and OEICs usually make dividend distributions which are subject to corporate streaming (Regulations 48-51 SI2006/964). | Annual deemed disposal at market value with gains spread over 7 years TCGA92/S212. Special rules for losses. |
| Bond funds - unit trusts, OEICs and offshore funds | If one of these funds meets the qualifying investments test, units held by a corporate are treated as rights under a creditor relationship and a distribution is treated as a loan relationship credit (or debit) – see CTA09/Part 6/CH 3 | If qualifies as a bond fund not within chargeable gains rules as treated as loan relationship |
| Authorised contractual schemes (ACS) LAM03350 | Transparent: investors taxed on their share of underlying income as it arises | Co-ownership ACS: holding treated as asset for capital gains. TCGA92/S212 annual deemed disposal. Losses - special rules. Partnership ACS - transparent investor taxed on underlying share of capital gains |
| Offshore reporting funds (other than bond funds) | Income is the reportable income of the fund | As for AUTs and OEICs |
| Offshore non-reporting funds other than partnerships | Opaque fund: income is amount distributed (or treated as distributed) by the fund. Transparent fund: Income is underlying income of the fund | As for AUTs and OEICs. SI2009/3001/Regulation 27 means that the disposal of interests held for the purposes of long-term business does not give rise to an offshore income gain. |
| Real estate investment trusts (REITs) | Property income distributions are taxed as income from property CTA10/S548(5). Other distributions are taxed as per equities above | TCGA92/S212 annual deemed disposal. Special rules for losses |
| Investment trusts | Interest distributions (loan relationship credits) or equity distributions (exempt or exceptionally taxed as other equity holdings) | Disposals taxed on a realisation basis as for other equity holdings |
| Exempt unauthorised unit trust (EUUT) LAM03320 | Income is the amount shown in EUUT’s accounts as available for payment to investor or for re-investment in the fund. | N/A –certain life companies that qualify as eligible investors can invest in EUUTs and the Trustees of the fund will continue to benefit from the exemption from tax on chargeable gains. |
| Non-exempt unauthorised unit trusts (NEUUT) | NEUUT taxed as if it is a company and units are shares. Normal rules for distributions from companies apply | Normal CG rules apply on disposal of an interest in a NEUUT |
| Partnerships, including offshore | Normally transparent: taxed on underlying share of income | Taxed on share of disposals of underlying assets |
| Venture capital partnerships LAM03630 | Normally transparent: taxed on underlying share of income | Schedule 7AD applies to modify partnership rules for limited partners as a simplification |
| Stock lending CFM74100 and repos CFM46200 | Stock lending fees taxed as income. Manufactured payments dependent on underlying securities. Repos per CTA09/Part 6/Chapter 10 |
The above list is not exhaustive. It highlights the main types of vehicle/investment return that may be involved and the BLAGAB tax treatment. The portfolio mix can vary significantly between different groups and companies. Loan relationships, equities and collective investment vehicles tend to be the largest part of portfolios. Property holdings vary but tend to be a smaller proportion but still material in many cases and may be held within investment vehicles.