Finance Bill

House of Commons

Session 2004 - 05
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Finance Bill

Finance Bill
Schedule 9 — Insurance companies etc
196

(b)
at the end insert “and of any relevant debts”.
      (3)
After that subsection insert—
“(2A)
Subject to subsections (2C) and (2D) below, subsection (2B) below
applies if—
(a)
the aggregate amount of the liabilities to policy holders and
5
annuitants transferred to the transferee and of any relevant
debts, exceeds
(b)
the element of the transferee’s line 31 figure representing the
transferor’s long-term insurance fund.
(2B)
Where this subsection applies—
10
(a)
the excess is to be taken into account as a receipt of the
transferee in computing in accordance with the provisions of
this Act applicable to Case I of Schedule D the profits of its
life assurance business for the period of account of the
transferee in which the transfer takes place (“the relevant
15
period of account”); and
(b)
the relevant proportion of the excess is to be taken into
account as a receipt of the transferee in so computing the
profits of each category of its life assurance business for the
relevant period of account;
20

and, for this purpose, “the relevant proportion”, in relation to a
category of the transferee’s life assurance business, is the proportion
that the liabilities of that category that are transferred bear to the total
liabilities transferred.
(2C)
Subsection (2B) above does not require the excess to be taken into
25
account as a receipt of the transferee in so computing the profits of
its life assurance business for the relevant period of account if—
(a)
transferred liabilities of an aggregate amount equal to the
excess are not taken into account in so computing those
profits for that period of account, and
30
(b)
the amount of the closing liabilities of that period of account
is taken into account as opening liabilities in so computing
those profits for the next period of account.
(2D)
Subsection (2B) above does not require the relevant proportion of the
excess to be taken into account as a receipt of the transferee in so
35
computing the profits of a category of its life assurance business for
the relevant period of account if—
(a)
transferred liabilities of an aggregate amount equal to the
relevant proportion of the excess are not taken into account in
so computing those profits for that period of account, and
40
(b)
the amount of the closing liabilities of that period of account
is taken into account as opening liabilities in so computing
those profits for the next period of account.
(2E)
In subsections (2C)(a) and (2D)(a) above “transferred liabilities”
means—
45
(a)
liabilities to policy holders or annuitants at the end of the
relevant period of account that were transferred to the
transferee, and

Finance Bill
Schedule 9 — Insurance companies etc
197

(b)
payments made to discharge, during that period of account,
liabilities to policy holders or annuitants that were
transferred to the transferee.”.
      (4)
After subsection (3) insert—
“(4)
In this section “relevant debts” means debts which become debts of
5
the transferee’s long-term insurance fund as a result of the transfer.
(5)
But if—
(a)
the fair value, as at the date of the transfer, of the assets which
become assets of the transferee’s long-term insurance fund as
a result of the transfer, exceeds
10
(b)
the element of the transferee’s line 31 figure representing the
transferor’s long-term insurance fund,

the amount of any relevant debts for the purposes of this section is to
be reduced (but not below nil) by the excess.
(6)
In determining the amount of the liabilities transferred for the
15
purposes of this section, there is to be disregarded any reduction in
the transferee’s liabilities resulting from reinsurance under a
contract of reinsurance which is a relevant financial reinsurance
contract (within the meaning of section 82C of the Finance Act 1989).
(7)
But where—
20
(a)
such a reduction results from reinsurance under a contract
which was entered into by the transferor as cedant before the
day on which the transfer takes place, and
(b)
the transferor’s rights and obligations under the contract are
transferred to the transferee under the transfer,
25

the amount of the reduction that would (apart from this subsection)
be disregarded under subsection (6) above shall be reduced (but not
below nil) by the amount given by subsection (8) below or, if less, the
amount given by subsection (9) below.
(8)
The amount given by this subsection is the amount by which the
30
liabilities at the end of the closing period which fell to be taken into
account in computing in accordance with the provisions of this Act
applicable to Case I of Schedule D the profits of the transferor’s
business for that period were reduced as a result of reinsurance
under the contract.
35
(9)
The amount given by this subsection is the amount given by
paragraph (a) below reduced (but not below nil) by the amount
given by paragraph (b) below—
(a)
the amount given by this paragraph is the aggregate of the
relevant amounts for any accounting period, and for this
40
purpose the relevant amount for an accounting period is the
amount in sub-paragraph (i) or (ii) below or, where
applicable, the aggregate of those amounts—
(i)
the amount by which the profits of the transferor’s
business, computed in accordance with the
45
provisions of this Act applicable to Case I of Schedule
D, were increased for that accounting period as a
result of reinsurance under the contract;

Finance Bill
Schedule 9 — Insurance companies etc
198

(ii)
the amount by which the losses of the transferor’s
business, so computed, were reduced for that
accounting period as a result of reinsurance under the
contract; and
(b)
the amount given by this paragraph is the aggregate of the
5
relevant amounts for any accounting period, and for this
purpose the relevant amount for an accounting period is the
amount in sub-paragraph (i) or (ii) below or, where
applicable, the aggregate of those amounts—
(i)
the amount by which the profits of the transferor’s
10
business, so computed, were reduced for that
accounting period as a result of a reduction in
reinsurance under the contract;
(ii)
the amount by which the losses of the transferor’s
business, so computed, were increased for that
15
accounting period as a result of a reduction in
reinsurance under the contract.
(10)
In subsections (8) and (9) above—
“the closing period” means the accounting period of the
transferor ending with the day on which the transfer takes
20
place;
“the transferor’s business” means—
(a)
the transferor’s life assurance business, and
(b)
any category of its life assurance business to which
the liabilities relate.
25
(11)
For the purposes of this section and section 444ACA—
“fair value” has the meaning given by section 444AB(6);
“insurance business transfer scheme” includes a scheme which
would be such a scheme but for section 105(1)(b) of the
Financial Services and Markets Act 2000 (which requires the
30
business transferred to be carried on in an EEA State).”.
      (5)
The heading of the section accordingly becomes “Transfers of business:
excess of assets or liabilities”.
      (6)
The amendments made by this paragraph have effect in relation to insurance
business transfer schemes (within the meaning given by section 444AC(11)
35
of ICTA) taking place on or after 2nd December 2004.
      (7)
But in relation to a period of account beginning before 1st January 2005,
section 444AC(2A)(b) and (5)(b) of ICTA shall have effect as if for “line 31
figure” there were substituted “line 15 figure”.
Transfers of business: transferor shares are assets of transferee’s long-term insurance fund etc
40
7     (1)
After section 444AC of ICTA insert—
“444ACA
  Transfers of business: transferor shares are assets of transferee’s
long-term insurance fund etc
(1)
This section applies where an insurance business transfer scheme
(see section 444AC(11)) has effect to transfer long-term business from
45
one company (“the transferor”) to another (“the transferee”).

Finance Bill
Schedule 9 — Insurance companies etc
199

(2)
If—
(a)
immediately before the transfer, the assets of the long-term
insurance fund of the transferee comprise or include relevant
shares or an interest in such shares, and
(b)
the fair value (see section 444AC(11)) of the relevant shares,
5
or of that interest, is reduced (whether or not to nil) as a result
of the transfer,

an amount equal to that reduction in fair value is to be taken into
account under section 83(2) of the Finance Act 1989 as a receipt of the
transferee of the period of account of the transferee in which the
10
transfer takes place.
(3)
But if—
(a)
the assets transferred to the transferee under the transfer
comprise or include assets (“the relevant assets”) which,
immediately before the transfer,—
15
(i)
were assets of the transferor, but
(ii)
were not assets of the transferor’s long-term
insurance fund, and
(b)
in respect of the transfer of the relevant assets, an amount is—
(i)
brought into account by the transferee as other
20
income of the transferee of the period of account of
the transferee in which the transfer takes place, and
(ii)
taken into account in computing in accordance with
the provisions of this Act applicable to Case I of
Schedule D the profits of the transferee’s life
25
assurance business and any category of its life
assurance business to which the amount is referable,

the amount taken into account under section 83(2) of the Finance Act
1989 by virtue of subsection (2) above shall be reduced (but not
below nil) by an amount equal to the amount referred to in
30
paragraph (b) above.
(4)
In subsection (2) above “relevant shares” means—
(a)
some or all of the shares in the transferor, or
(b)
some or all of the shares in a company (whether or not an
insurance company) which owns, directly or indirectly,—
35
(i)
some or all of the shares in the transferor, or
(ii)
an interest in some or all of those shares.
(5)
In subsection (4) above “shares”, in relation to a company, includes
any interests in the company possessed by members of the
company.”.
40
      (2)
The amendment made by this paragraph has effect in relation to insurance
business transfer schemes (within the meaning given by section 444AC(11)
of ICTA) taking place on or after 2nd December 2004.
Equalisation reserves for general business
8     (1)
Section 444BA of ICTA is amended as follows.
45

Finance Bill
Schedule 9 — Insurance companies etc
200

      (2)
In subsection (11) (meaning of “equalisation reserves rules”) for “Chapter 6
of the Prudential Sourcebook (Insurers)” substitute “chapter 7.5 of the
Integrated Prudential Sourcebook”.
      (3)
The amendment made by this paragraph has effect in relation to periods of
account ending on or after 31st December 2004.
5
Unappropriated surplus on valuation
9     (1)
Section 82B of FA 1989 is amended as follows.
      (2)
In subsection (1) (section to apply where insurance company has
unappropriated surplus on valuation and has not made an election in
accordance with Rule 4.1(6) of the Prudential Sourcebook (Insurers) for the
10
period of account in question) in paragraph (b), for “Rule 4.1(6)” substitute
“Rule 9.10(c)”.
      (3)
The amendment made by this paragraph has effect in relation to periods of
account ending on or after 31st December 2004.
Relevant financial reinsurance contracts
15
10    (1)
Section 82C of FA 1989 is amended as follows.
      (2)
In subsection (1) (cases where section applies) in paragraph (b), for “either
condition A or condition B” substitute “condition A”.
      (3)
Omit subsections (4), (5), (8) and (9) (provisions relating to condition B).
      (4)
The amendments made by this paragraph have effect in relation to insurance
20
business transfer schemes (within the meaning given by section 82C(9) of FA
1989) taking place on or after 2nd December 2004.
Receipts to be taken into account
11    (1)
Section 83 of FA 1989 is amended as follows.
      (2)
In subsection (2A) (amounts not required to be taken into account by
25
subsection (2)) for paragraph (a) (amounts which are entirely notional)
substitute—
“(a)
comprises notional income for the period of account (see
subsection (2AA)),
(aa)
represents an inter-fund transfer (see subsection (2AC)),”.
30
      (3)
After that subsection insert—
“(2AA)
For the purposes of subsection (2A)(a) above, an amount brought
into account as mentioned in paragraphs (a) to (d) of subsection (2)
above for a period of account is to be regarded as notional income for
the period of account if—
35
(a)
it represents income which has not been received, and is not
receivable, from another person, and
(b)
a corresponding notional expense of the same amount is
brought into account in the period of account;

and where particular income falls to be regarded as notional income
40
under this subsection, the notional expense by virtue of which that

Finance Bill
Schedule 9 — Insurance companies etc
201

income falls to be so regarded may not be taken into account for
determining whether any other income is to be so regarded.
(2AB)
In subsection (2AA) above “notional expense” means an expense
which has not been paid, and is not payable, to another person and
which—
5
(a)
is not deductible in computing the profits of the company in
respect of its life assurance business in accordance with the
provisions of the Taxes Act 1988 applicable to Case I of
Schedule D, but
(b)
had it represented an amount paid or payable to another
10
person, would have been so deductible.
(2AC)
For the purposes of subsection (2A)(aa) above, where—
(a)
one or more inter-fund transfers (“transfers-in”) are made
into a fund and one or more inter-fund transfers (“transfers-
out”) are made out of the fund, and
15
(b)
the amount brought into account for the period of account as
other income in respect of the transfers-in represents the
amount by which—
(i)
the amount or aggregate amount of the transfers-in,
exceeds
20
(ii)
the amount or aggregate amount of the transfers-out,

only the amount of that excess shall be taken to represent the
transfers-in.
(2AD)
In this section “inter-fund transfer” means a transfer between two
funds which in the company’s periodical return is shown in, or
25
included in amounts shown in, line 14 or 33 of the Forms 58 for the
funds.”.
      (4)
The amendments made by this paragraph have effect in relation to periods
of account ending on or after 2nd December 2004.
Meaning of “brought into account”
30
12    (1)
Section 83A of FA 1989 is amended as follows.
      (2)
In subsection (2) (accounts which are recognised for the purposes of sections
82A to 83AB)—
(a)
in paragraph (b) (separate revenue account prepared under Chapter
9 of the Prudential Sourcebook (Insurers) in respect of a part of the
35
company’s long-term business to be a recognised account) for “part
of that business” substitute “with-profits fund (see subsection (6))”;
(b)
omit the words from “Paragraph (b) above” to the end of the
subsection.
      (3)
After subsection (3) insert—
40
“(3A)
Where, in the case of any with-profits fund in respect of which there
is prepared such a separate account (“the sub-fund”),—
(a)
the sub-fund forms part of another with-profits fund (“the
wider fund”) in respect of which such a separate account is
also prepared,
45

Finance Bill
Schedule 9 — Insurance companies etc
202

(b)
in the case of a company whose life assurance business is
mutual business, the sub-fund and each other with-profits
fund which forms part of the wider fund are 100:0 funds, and
(c)
the wider fund—
(i)
does not form part of another with-profits fund in
5
respect of which such a separate account is also
prepared, or
(ii)
forms part of another with-profits fund in respect of
which such a separate account is also prepared and
that separate account is treated by this subsection as
10
not being a recognised account for the purposes of
those sections,

the account in respect of the wider fund shall not be a recognised
account for the purposes of those sections.
(3B)
Where, in the case of such a separate account prepared in respect of
15
a with-profits fund,—
(a)
the account is not prevented from being a recognised account
for the purposes of those sections by virtue of subsection (3A)
above, but
(b)
if paragraph (b) of that subsection were to be omitted, the
20
account would be prevented from being such a recognised
account by virtue of that subsection,

no such separate account prepared in respect of a with-profits fund
forming part of that fund shall be such a recognised account.
(3C)
In subsection (3A) above “100:0 fund” means a fund in the case of
25
which—
(a)
the policyholders of the fund are entitled to participate in all
the profits of the fund, and
(b)
no other persons are entitled to participate in any of the
profits of the fund.
30
(3D)
Subsection (3E) below applies where there is prepared such a
separate account (“the with-profits account”) in respect of a with-
profits fund—
(a)
of which no other with-profits fund forms part, but
(b)
of which a non-profit fund (see subsection (6)) forms part.
35
(3E)
Where this subsection applies—
(a)
the with-profits account shall not be a recognised account for
the purposes of those sections, but
(b)
there shall be treated as having been required and prepared
a further separate revenue account covering so much of the
40
items brought into account in the with-profits account as
remains after excluding the items brought into account in
that account in respect of the non-profit fund.”.
      (4)
For subsection (4) substitute—
“(4)
If—
45
(a)
a company prepares a revenue account in respect of the
whole of its long-term business (“the main account”),
(b)
it prepares one or more such separate accounts as are
mentioned in subsection (2)(b) above, and