Schedule 10
Finance Bill
4:30 pm
Edward Balls (Economic Secretary, HM Treasury; Normanton, Labour)
I shall try to be brief, but at the same time to provide a bit of context for the amendments in order to satisfy Members on both sides of the Committee, who will be interested to know the detail of the schedule.
The schedule contains a range of measures to clarify and simplify miscellaneous life assurance tax provisions, most of which arise from the life assurance tax rules consultation process. I shall discuss the first of them, covered by paragraphs 1 and 2, when I highlight the amendments. The other important measure in schedule 10, packaged in paragraph 3, is a reform of the treatment of so-called structural assets held by a life insurance company in its long-term insurance fund. Structural assets are held by an insurance company as part of its trading structure, as opposed to assets that are expected to be turned over in the course of its trade. A major example, and one included in the Bill, is shares in subsidiary companies that themselves are insurance companies.
However, where structural assets are held in a company’s long-term insurance fund, inappropriate tax rules can arise, because the life insurance tax rules assume that all assets held in a long-term fund are held or sold in the course of the company’s insurance business. For example, dividends from insurance subsidiaries through structural assets are subject to corporation tax, whereas dividends from structural subsidiaries of other types of trading company are exempt.
As taxation of life insurance companies is based on their regulatory returns, it follows that write-downs can result in a tax deduction where there is no economic loss. Following consultation with the life insurance industry, we have introduced paragraph 3, which will reform the taxation of structural assets, treating them as capital assets rather than trading assets. Dividends from structural assets will be exempt from tax, giving the insurance industry parity with other traders.
A further measure in paragraph 4 will remove the restriction on use of capital losses where a life insurance company sells holdings in an authorised unit trust or an open-ended investment company to the manager of that trust or company, and that manager is a member of the same group of companies as the life insurer. The capital gains rules impose restrictions on the use of capital losses on all disposals between connected parties, such as members of the same group. The policy reason is that connected parties have opportunities to manipulate the circumstances of the disposal that are not available to independent parties.
However, where a life insurer disposes of holdings in unit trusts or open-ended investment companies, both Financial Services Authority rules and life insurance tax rules ensure that the disposal is at market value and minimise opportunities for manipulation, regardless of who acquires the assets. For that reason, the life insurance industry has argued that it is unfair to restrict any losses arising. The Government accept its argument, and schedule 10 will remove the restrictions.
The remainder of the schedule comprises a general tidying up of life insurance tax rules, modernising definitions, removing duplication by putting all definitions in one place and repealing spent or obsolete provisions. I look forward to the scrutiny of my hon. Friend the Member for Wolverhampton, South-West and to seeing whether obsolescence and obscurity have been fully tackled.
The amendments will modify the new provisions in response to our consultation. Paragraph 3 will reform the taxation of structural assets, treating them as capital assets rather than trading assets. Dividends from structural assets will now be exempt from tax, giving the insurance industry parity. The schedule defines structural assets initially as shares in and loans to subsidiaries of insurance companies that themselves write insurance business. The measure also includes a regulatory power to add to or amend the list of structural assets; however, the life insurance industry will be consulted before that power is exercised.
A short time ago, the Association of British Insurers and other parties sent a number of representations to Her Majesty’s Revenue and Customs about the new measures. At the time, it was thought that the schedule would be debated last week, so HMRC was able to deal immediately with only two straightforward points, which are covered by Government amendments Nos. 91 and 92. But when debate on the schedule was deferred to today, I agreed that further amendments—Government amendments Nos. 130 to 133—should be tabled now, rather than on Report, to give effect to many of the ABI’s requests for clarification and relaxation.