Commentary

D7.5104 Contingent loans

Corporate tax
Corporate tax | Commentary

D7.5104 Contingent loans

Corporate tax | Commentary

D7.5104 Contingent loans

These rules do not apply for periods of account beginning on or after 1 January 2008 when they are replaced by the legislation for financing-arrangement-funded transfers to shareholders (see D7.5102).

In the context of life insurance a contingent loan is usually taken to mean a loan to the long-term insurance fund, repayment of which is contingent on the emergence of surplus at some point in the future. Although the borrower's statutory accounts will show the loan liability, there is no need to recognise the liability to repay the loan until the contingency crystallises and surplus has emerged in the company's regulatory return. Such loans are therefore efficient from a regulatory solvency point of view because they increase assets with no corresponding increase in liabilities. Historically in most cases such loans were tax neutral because the principal and its eventual repayment did not feature at all in the company's regulatory revenue account except as a movement in the fund carried forward. However HMRC became concerned that some companies were using such loans to extract surplus while simultaneously deferring or even eliminating the tax charge on the extraction. Accordingly as part of the package of reforms introduced by FA 2003, HMRC addressed those concerns regarding the use of contingent loans by using legislation to enforce effective tax neutrality in all

To continue reading
View the latest version of this document, as well as thousands of others like it, sign in to TolleyLibrary or register for a free trial