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Other news - Business property relief

16 May 2001
Issue: 3807 / Categories:

When an individual member of Lloyd's dies, his or her Lloyd's interest may be chargeable to inheritance tax. The Lloyd's interest comprises assets held in funds at Lloyd's and the special reserve fund, underwriting profits or losses for open years of account and undistributed syndicate profits or unpaid losses for closed accounts.

When an individual member of Lloyd's dies, his or her Lloyd's interest may be chargeable to inheritance tax. The Lloyd's interest comprises assets held in funds at Lloyd's and the special reserve fund, underwriting profits or losses for open years of account and undistributed syndicate profits or unpaid losses for closed accounts.

Individual members are, however, eligible for 100 per cent business property relief on the value of assets that are used wholly or mainly for the purpose of their Lloyd's business, provided certain conditions are met. Two recent tax cases have led to queries as to whether the Inland Revenue will be changing its policy or practice on the availability of business property relief. The cases are Commissioners of Inland Revenue v Mallender [2001] STC 514 and Hardcastle v Commissioners of Inland Revenue (SpC 259).

Where a member provides a bank guarantee as part of his or her funds at Lloyd's, the Inland Revenue allows 100 per cent business property relief up to the amount of the guarantee, provided that the amount is so used. In the Mallender case, the taxpayers contended that business property relief should be given on the total value of the asset backing a guarantee rather than being limited to the amount of the guarantee. The court rejected this argument, finding that the asset that underlay the guarantee did not itself qualify for relief. Following the judgment, the Inland Revenue has confirmed that it will continue its existing practice of allowing individual members 100 per cent business property relief on the value of bank guarantees used as part of a member's funds at Lloyd's.

The profits or losses for open years of account at the time of death enter into the valuation of the estate for inheritance tax. The Revenue also includes these profits or losses in the value of the Lloyd's business for business property relief. In the Hardcastle case there were open year losses. The taxpayers argued that, although they entered into the valuation of the total estate, these losses should not be deducted from the other net assets of the Lloyd's business in calculating the amount of business property relief due. The Special Commissioner decided in the taxpayers' favour. The Revenue considers this decision to have been decided on its own particular facts and not to be of general application. It will therefore continue its existing practice of deducting open year losses from other Lloyd's assets in determining the amount of business property relief that is due. Likewise, it will continue its practice of giving business property relief on any open year profits.

Editorial note. There is in fact nothing in the Hardcastle case to support the Revenue's view concerning the decision but, being a Special Commissioner's decision, it is not a binding precedent.

(Source: Lloyd's Market Bulletin dated 8 May 2001.)

 

General insurance reserves

The rules for discounting general insurance reserves for tax purposes have been set out in regulations laid by the Inland Revenue recently. These regulations put into effect changes introduced in last year's Finance Act requiring tax deductions for claims provisions to be checked against the eventual cost of the claims.

One of the changes to have been made following consultation is that the regulations now provide for seven different discount rates, rather than just one as initially envisaged, or three in the draft regulations. A company may elect for one or more of the foreign currencies to be used if its liabilities are denominated in the currency, or if it accounts for its business in the currency. If the company makes such an election, the discount rate will be set by reference to the currency and the adjustments under these regulations will be calculated in the currency.

The regulations provide detailed rules for the implementation of section 107, Finance Act 2000. They proceed by a series of rules by which tax deductions for unpaid liabilities made in earlier periods are checked against the actual cost of those liabilities. If the difference between the deduction and the discounted cost of the liabilities is more than five per cent, a sum representing interest is either added to or deducted from taxable profits to compensate.

Section 107 itself allows insurers to calculate their tax deduction on a discounted basis, with a view to avoiding these later interest charges.

The regulations use a discounted valuation of liabilities, since this better reflects their true economic cost. The discount rate is based on rates of return on risk free sterling investments, or by reference to one of six other foreign currencies: euro, United States dollar, Canadian dollar, Australian dollar, Swiss franc or Japanese yen. For insurance companies with a 31 December account date, the initial sterling discount rate will be 2.79 per cent.

The foreign currency discount rates are based on the sterling rate, adjusted by reference to London Interbank Offered Rates (LIBOR) on 12 month deposits. The sterling LIBOR is compared to the foreign currency LIBOR and the discount rate is adjusted accordingly.

The regulations will have effect for any accounting period that begins on or after 1 January 2001 and which ends after the regulations come into force. They apply to general insurance companies and Lloyd's members, but Lloyd's members are only affected if they participate in at least 4 per cent of the business carried on by a Lloyd's syndicate. They also apply to controlled foreign companies that carry on general insurance business.

The regulations are The General Insurance Reserves (Tax) Regulations 2001 (SI 2001 No 1757). Copies of the regulations will be available from the Stationery Office, and on the Revenue website at www.inlandrevenue.gov.uk.

(Source: Inland Revenue press release dated 8 May 2001.)

Issue: 3807 / Categories:
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