588 Demutualisation of assurance companies

Summary

This section addresses the tax aspects of rights which a member of a mutual assurance company receives following a demutualisation of the company. These are the rights to acquire —

• shares in a successor company in priority to other persons,
• shares in the successor company for consideration of an amount or value lower than the market value of the shares, or
• free shares in the successor company.

Members who receive such rights will have them regarded as an option and the effect of this is to ignore the transaction for capital gains tax purposes and to treat the acquisition of the right and the acquisition of the shares when the right is exercised as a single transaction.

The section also provides that where a member of an assurance company which demutualises receives shares in the successor company, the cost of those shares for capital gains tax purposes is to be restricted to the amount of any new consideration paid by the person. This ensures that on disposal of those shares the gain or loss will be computed by reference to the actual amount paid for shares.

Details

Definitions

(1) “assurance company” means —

1. an assurance company within the meaning of section 3 of the Insurance Act, 1936, or
2. a person that holds an authorisation within the meaning of the European Communities (Life Assurance) Framework Regulations 1994 (S.I. No. 360 of 1994).

“free shares” are shares issued for no new consideration.

“member” is a person who is or was a member of the assurance company and includes a member of any class or description.

“new consideration” does not include any amount paid out of the assets of the assurance company or the successor company or out of the member’s shares or rights in those companies.

Application

(2) The section applies as on and from 21 April, 1997 where an assurance company which carries on a mutual life business makes an arrangement to which section 587(2) applies by virtue of section 587(3). In summary, section 587(2) provides that where an arrangement is entered into by a company with its shareholders for the purpose of reconstructing or amalgamating the company and, as part of the arrangement, another company issues shares to the shareholders in proportion to their original holdings and the original holdings are either retained or cancelled, section 586(1), which deems such exchanges to be a reorganisation of share capital (and hence not giving rise to a charge to capital gains tax), will apply.

Section 587(2), therefore, applies to companies and persons holding shares or debentures in companies. As policy holders of mutual life assurance companies are not strictly shareholders, it is necessary to apply section 587(3) in this situation. Section 587(3) applies section 587(2), as described above, in situations where a company has no share capital but its members have interests in the company.

Right to acquire shares deemed to be an option

(3) The right of a member of an assurance company to acquire shares in the successor company is treated for capital gains tax as an option. This applies where the right is to receive shares free or for less than their market value, or if the member is entitled to the shares in priority to other members. The effect of treating the acquisition of the right as an option is to ignore that transaction for tax purposes and to treat the acquisition of the right and the acquisition of the shares when the right is exercised as a single transaction.

Zero base cost or cost equal to consideration given

(4) Where a member of an assurance company receives shares in the successor company and those shares are treated under section 587 as having been obtained by the member in exchange for the interest in the company possessed by the member, the cost of those shares for capital gains tax purposes is restricted to the amount of any new consideration paid by the person. Their value on acquisition is taken to be the amount of any new consideration paid by the person. This ensures that on disposal of the shares the gain is computed by reference to the actual amount paid for the shares.

Where shares are acquired by the member pursuant to a right to acquire them either at less than market value or in priority to others, no part of the cost of the shares to that person can be attributed to the acquisition of the rights.

Trustees and beneficiaries of trusts

(5) A special rule applies to deal with cases where shares in the successor company are issued to trustees for transfer to the members of the society for no new consideration, and the shares are held in trust by the trustees.

(6)(a) In any such case —

• the trustees are regarded as having acquired the shares for no consideration,
• the members’ interest in the settled property (being the shares) is regarded as acquired for no consideration, and
• when a member becomes absolutely entitled as against the trustees to any of the shares the trustees are regarded as having disposed of those shares for consideration which would give rise to neither a gain nor a loss. The member is treated as having acquired the shares for the consideration at which they were acquired by the trustees.

(6)(b) This rule also applies to a person becoming absolutely entitled as against the trustees to any of the shares even if that person, being a minor or for any other legal disability, might not in general law become so entitled.

(7) An assurance company that demutualises is required to make a return to the Revenue Commissioners setting out in respect of each of its members—

• the name and address,
• the number of shares in the successor company which the member has a right to acquire,
• the amount of new consideration which the member is required to give for those shares,
• the value of any assets of the assurance company to which the member has a right, and
• such other information that the Revenue Commissioners require.

Relevant Date: Finance Act 2019