715 Annuity business: separate charge on profits

Summary

This section deals with the computation and charge to tax of profits arising to an assurance company from pension business and general annuity business.

Details

(1) Where an assurance company is not charged to tax under Case I of Schedule D in respect of its life assurance business, profits arising to the company from pension business or general annuity business are treated as annual profits or gains chargeable to tax under Case IV of Schedule D. The pension business and general annuity business are each treated as a separate class of business and, although charged under Case IV of Schedule D, the profits of such businesses are computed in accordance with the computational rules of Case I of Schedule D.

In making the computation under Case I of Schedule D —

• (2)(a)(ii) a deduction is allowed for profits allocated to pension business policyholders or annuitants but not for profits reserved for such persons;
• (2)(a)(iii) investment gains and losses (whether realised or unrealised) which arise on any fund held to match the company’s liabilities to its policyholders are to be included in the computation of profits to the same extent that they are included in the liability of the company to its policyholders. The reference is to the liability as valued by an actuary for the purposes of the relevant periodic return. “Actuary” and “periodic return” are defined in section 706;
• (2)(a)(iv) where a company is bringing into the computation exchange gains and losses on the fund, referred to above, for the first time, those gains and losses are to be measured by reference to the original cost of the investments – subsection (2)(a)(iii) took effect as respects accounting periods ending on or after 4 March 1998;
• (2)(b) no deduction is allowed for management expenses; and
• (2)(c) losses from a previous period may be carried forward against profits of the same class of business.

(3) The set off of losses provisions of Case IV of Schedule D (section 399) do not apply to a loss sustained by a company on its general annuity business or pension business.

(4) The full amount of an annuity (including the capital element) can be deducted in computing profits or be treated as a charge on income even though it contains a capital element under the provisions of section 788.

(5) Relief, by way of a charge on income, for annuities referable to the “excluded annuity business” of a life assurance company is not available. Excluded annuity business is defined in section 706 and is essentially insurance linked investment bonds. Such annuities are, however, allowed against the income of life assurance business for the purposes of a Case I of Schedule D computation. The corresponding receipt (that is, the consideration given to the company for the granting of the annuity) will be included in the computation of profits as a trading receipt.

Relevant Date: Finance Act 2019