Commentary

D7.5102 Financing-arrangement-funded transfers to shareholders

Corporate tax
Corporate tax | Commentary

D7.5102 Financing-arrangement-funded transfers to shareholders

Corporate tax | Commentary

D7.5102 Financing-arrangement-funded transfers to shareholders

The rules in this division apply for accounting periods beginning before 1 January 2013. For accounting periods beginning on or after 1 January 2013 see Division D7.4.

The financing-arrangement-funded transfer to shareholders ('FAFTS') rules apply for periods of account beginning on or after 1 January 2008 and set out the tax treatment of certain additions to a company's long-term insurance fund, whether by way of contingent loan or through the use of financial reinsurance1. This regime replaces the provisions previously in FA 1989, ss 82C and 83ZA (D7.5103, D7.5104) which were recognised as relatively inflexible and potentially inhibited a company's commercial activities. The principle behind the new legislation is that while it is perfectly appropriate for a company to introduce capital tax free into its long-term fund to provide backing for its business, HMRC will seek to tax that capital if, and then only to the extent that, it is used to fund a transfer to shareholders. However a transfer to shareholders that is funded from the surplus emerging on the business in the fund will not give rise to a tax charge, which is the key difference between the new legislation and its predecessors. Furthermore a transfer to shareholders is automatically assumed to be out of such 'natural' surplus rather than the capital introduced.

The legislation in FA 1989, ss 83YC–83YF is complex in drafting but simple in concept once the guiding principle behind it has been grasped. It applies only to non-profit funds (ie

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