Reinsurance of BLAGAB business

I recently received a query from a client on the tax implications of reinsuring BLAGAB business from an unconnected company.  I was aware that HMRC had been looking to amend the regulations on this point but this seems to have run into the buffers and SI 1995/1730 is still used to calculate the investment return that is treated as accruing to the cedant.

It is unfortunate that there has been no movement on this point as SI 1995/1730 was always rather unsatisfactory.  It was complicated to operate and could result in more I-E tax being payable than would be the case if the reinsurance had not been entered into. (As there was no allowance for indexation on gains etc).  I also thought the calculation was potentially vulnerable to tax avoidance arrangements - although the fact that the methodology has been place since 1995 - pretty much unchanged - suggests this is not the case.

I would have thought that you could sweep si 1995/1730 away in its entirety.

That is FA 2012 now reads

"90(2)  For the purposes of the I – E rules the investment return on the policy or contract is treated as accruing to the company while the risk remains reinsured by the company under the re-insurance arrangement.

90(3)  The investment return that is treated as accruing to the company–"

Could you then insert.  "Where assets are transferred by the cedant to the reinsurer the investment return referred to section 90 (3) is equal to the taxable income and capital gains arising on those transferred assets.

Where there is no transfer of assets to the reinsurer by the cedant or assets are deposited back to the cedant the investment return is equal to any interest payable on the premium withheld or deposit back amount."

And problem solved.  Where companies don't want the faff of calculating taxable investment income and capital gains on an exact basis they could always agree something sensible with HMRC up front.

Probably not a big point as I suspect third party reinsurance of BLAGAB business would be a fairly infrequent event regardless of the tax rules.  (My client quickly realized there was a whole range of non  - tax reasons for not proceeding).  But there are circumstances where reinsurance is a useful tool and best if the tax rules are clear and don't get in the way of commercial transactions.