Commentary

D7.5105 Taxing the investment reserve

Corporate tax
Corporate tax | Commentary

D7.5105 Taxing the investment reserve

Corporate tax | Commentary

D7.5105 Taxing the investment reserve

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.

It is common practice for companies writing with-profits business (in which the policy holders share in surplus by way of bonuses) to keep part of their investment gains back in good years to make up any shortfall in returns in bad years and thus smooth policy holder returns over the long term. This deferral, which is permitted by FSA rules1, is made by recognising assets in the regulatory return at less than their admissible value. The difference between the admissible value and the value recognised is shown at line 51 on Form 14 (where it is described as the excess of admissible value of the company's assets over the value of the liabilities of its long-term fund). It is often referred to by the shorthand term 'investment reserve'. HMRC accept that it is a proper feature of with-profits business to defer recognition of gains in this way; however their view is that it is not appropriate for a company writing wholly or mostly non-profit business (in which the policy holders have no right to share in surplus) to defer the emergence of taxable surplus in this way. FA 1989, ss 83YA and 83YB were introduced to counter this mechanism for potentially deferring tax2.

The legislation has effect for periods of account ending on or after 29 September 20053. It

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