Carry on Streaming

The authorised investment funds regulations in Statutory instrument 2006/964 are a good example of the perils of secondary legislation.  The regulations are changed frequently and at times without proper consideration of all of the ramifications a change will have - on two separate occasions the regulations have been inadvertently changed so as to prevent life assurance companies from streaming AIF dividends.

The second time this happened amending legislation was introduced by SI 2012 / 3043 and I have been looking at these amendments.  Fortunately the revisions do what was intended.  As before regulation 48 (2A) states that streaming does not apply to distributions to which "Chapter 2 of Part 3 of CTA 2009 applies" i.e. a dividend included in a trading profits computation.  However, a new regulation 48 (2A) (a) goes on to say,  "unless the dividend distribution is made to an insurance company in respect of any non-BLAGAB long-term business carried on by it"  (There is a similar provision for insurance special purpose vehicles.)

Accordingly, if a life insurance company receives a dividend attributable to its pension business then although the dividend is taxable in a trading profits computation (FA 2012 section 111) it will be streamed between UFII, FII and foreign income with the income tax deemed to be deducted from the UFII offset against the company's liability to corporation tax or repaid.  This ensures that when a life insurance company invests pension policyholder funds in, for instance, an  AIF investing in property (i.e. old style fund not a PAIF) it will be able to recover any corporation tax paid within the AIF.  This of course is the "right" result, as these are pension investments, it would  be inappropriate for there to be tax payable in the AIF that could not be recovered.

For BLAGAB business streaming should also apply as a trading profits basis of taxation is replaced by the I-E basis for BLAGAB (FA 2012 s68).  There is, perhaps, a slight ambiguity here as FA 2012 136 talks about a BLAGAB trade profit being the profit if the BLAGAB business were assessed on a trading profit basis but to my mind still pretty clear that streaming should apply.

For general insurance business dividends are not included in a trading profits computation (CTA 2009 130 (2)) so streaming of dividends should also apply here.

One other point I noticed whilst writing the above is that the definition of "C" i.e. the taxable income constituent in the UFII calculation in SI 2006/964 49 (2) has changed.  It is as before income in the AIF subject to tax less the net liability to corporation tax but now there is also a deduction for 

" any amount carried forward from an earlier accounting period and allowed as a deduction in computing the legal owner’s liability to corporation tax for the accounting period in which the last day of the distribution period falls"

I think the intention here is to prevent the deduction or offset of income tax deemed to be deducted from the UFII stream of an AIF dividend if the AIF itself has not paid tax.  That is say that you had a taxable AIF investing in property that for some reason had brought forward losses.  The AIF might use those losses to reduce its taxable income to nil and then pay a dividend.  Under the old streaming rules the dividend would be 100% UFII (as all of the income of the period is taxable).  If the dividend was received by a life insurer and referable to pension business then the insurance company would be able to reclaim or offset the income tax deemed to have been deducted on the UFII.  So a tax "credit" is created where no tax has been paid.  Under the new rules the unfranked percentage in the above example would be 0% as the taxable income "C" would be reduced by the tax losses utilised.  So counter intuitively a dividend from a property AIF would all be treated as "franked".