LAM03080 | Calculation of ‘I’ Income and chargeable gains: Land and property - separate property business and losses from property business FA12/S74(1)(a)

This manual has yet to be updated to reflect the charge to corporation tax arising from the disposal by non-residents of interests in UK land.

CTA09/PT4 sets out special rules for the corporation tax charge on income from property business.

FA12/S86 modifies those provisions and treats income from land, as set out below, as separate businesses for the purposes of applying the I-E rules. Note that non-BLAGAB property is outside the I-E rules and will form part of the non-BLAGAB trade profit. LAM07100 explains the rules that apply to trade profit.

FA12/S87 disapplies, for the purposes of I-E, the rules for utilisation of property business losses in CTA10/PT4/CH4 and introduces rules that require the separation of the different property businesses.

Under FA12/S86(3), property businesses are first divided into businesses where assets are held, or held other than, for long-term business.

S86(4) then splits assets held for long-term business into three

• those matched to BLAGAB liabilities (e.g. unit-linked life property funds);

• those matched to non-BLAGAB liabilities (e.g. unit-linked pension property fund); and

• those not matched to any long-term liabilities (e.g. held in a with-profits fund) (S86(4)).

These 3 categories are used to identify assets which give rise to BLAGAB chargeable gains and losses - see LAM03210. For long-term business assets not matched to any liabilities the apportionment provisions set out in FA12/PT2/CH4 are used to identify the proportion of those assets referable to BLAGAB - see LAM05040. Where property is partly matched to a long-term liability only that part of the asset is counted as matched (FA12/S86(5)).

BLAGAB property losses can be set off against other BLAGAB profits. A FA12/S87 net loss is a deemed management expense under S76 - see LAM04200.

The effect of S86 is to ensure that the normal rules in CTA09 for calculation of income from property still apply to BLAGAB property business, but the BLAGAB profits are separately identifiable. The separate treatment of land matched to a BLAGAB or other long-term liability (S86(5)) enables the tax rules to be more closely aligned with the commercial position as the tax on those assets is not impacted directly by the tax position of other property investments.

In other words, a BLAGAB unit-linked policy linked to property assets will have an amount based on the tax suffered by the company on those assets deducted from the liabilities to the policyholder as an expense. The actual profits on which the company is taxed, should, by virtue of the separation of the tax on BLAGAB matched assets be consistent with the profits which determine the tax charged to policyholder funds. This tax is effectively suffered by the policyholder ultimately via a reduction in benefits paid on redemption or maturity.

However, if there were net property losses, they can be set against any other BLAGAB property business profits (FA12/S87(4)) before being treated as a deemed management expense (S87(3)).

Gains and development activities

Disposals of interests in land by life companies referable to BLAGAB are taxed under normal chargeable gains rules. As for companies generally, if life companies hold property primarily to make profits from development value a charge to tax on profit as income (as opposed to capital gains) could potentially arise under CTA10/PT18 or from 5 July 2016, CTA10/PT8ZB. In practice, life insurers generally hold property for the long-term and this may include development activity as part of its life insurance investment activity.

Further detail on chargeable gains treatment of land-related transactions can be found at CG70200C onwards.