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Life Assurance: Taxation

Volume 712: debated on Wednesday 15 July 2009


My honourable friend the Exchequer Secretary to the Treasury (Sarah McCarthy-Fry) has made the following Written Ministerial Statement.

Life assurance companies are in general taxed on profits as they are recognised and made available to shareholders. The tax system recognises that, for with-profits business, profits on income and gains sometimes have to be held back to achieve the smoothing of returns that is an integral part of the business. This treatment can also apply where a company writes business in a non-profit fund.

When profits are held back in this way there is an Exchequer cost, but this is largely a matter of timing, in that tax should be paid when the deferred profits are recognised and made available to shareholders.

Recently however HMRC has seen an example of manipulation of this tax treatment in relation to a non-profit fund. The manipulation is to change the mix of the non-profit business for tax purposes so that when the previously unrecognised profits of the non-profit fund are recognised they escape tax altogether. Many hundreds of millions of pounds of tax have been avoided in this way.

The Government will introduce legislation to prevent such manipulation in future. Companies will not be able to change the mix of business in their non-profit funds in order to reduce the incidence of tax on their profits that have not yet been recognised. The Government also propose that in the future profits of non-profit business will be taxed as they arise.

In order to ensure the new legislation is appropriately targeted HMRC will consult with the life assurance industry. The precise nature of the new legislation will emerge from that consultation, but the intention is that the potential tax due on unrecognised profits in a non-profit fund will be determined by reference to the appropriate mix of business in 2009. The tax will become due and will be collected as and when profits are recognised and made available to shareholders. After 2009, profits of non-profit business will be taxed as they arise.

The objective of the consultation is to allow the new legislation to be properly targeted. If companies attempt to manipulate their business mix in advance of the new legislation being finalised, for the purposes of avoiding tax, the Government will consider whether it is necessary to introduce retrospective legislation to remove the benefit of that manipulation.