Clause 30 - Transfer of basic life assurance and general annuity business

Finance (No. 2) Bill – in a Public Bill Committee at 10:45 am on 16 May 2023.

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Question proposed, That the clause stand part of the Bill.

Photo of Esther McVey Esther McVey Conservative, Tatton

With this it will be convenient to discuss clauses 31 to 33 stand part.

Photo of Victoria Atkins Victoria Atkins The Financial Secretary to the Treasury

Clauses 30 and 31 address two issues concerning the tax rules that deal with reinsurance of a specific type of long-term insurance business known as basic life assurance and general annuity business, or more commonly, BLAGAB. Clauses 32 and 33 address the corporation tax and pension tax consequences that will arise from proposed new schedule 12 of the Financial Services and Markets Act 2000, which amends the procedure for a court-ordered write-down of an insurer’s liabilities when an insurer is in financial distress.

Clauses 30 and 31 were originally announced by the Economic Secretary to the Treasury in a written ministerial statement on 15 December 2022 and applied with effect from that date. They address the risk of both tax loss and unfair outcomes for insurers that could otherwise arise from commercial transfers of BLAGAB from one insurer to another.

Insurers writing BLAGAB are charged corporation tax under the “income minus expenses” basis of taxation, which seeks to tax the shareholder profits and the policyholder investment return together as a single taxable amount. When a BLAGAB book is reinsured prior to the transfer of a business, the shareholder profit and policyholder investment return become separated and are taxed differently, which could result in a tax mismatch. Clauses 32 and 33 prevent unintended tax consequences arising for both the insurer and individuals in the event of a court-directed write-down, which will help to ensure that such write-downs are a viable option to insurers in financial difficulty.

Clause 30 addresses a possible tax mismatch arising from the rules applying to the reinsurance of BLAGAB, which can result in a loss of corporation tax when a court-approved transfer of BLAGAB is preceded by reinsurance. In that situation, the clause classifies and taxes the reinsured business as BLAGAB in the hands of the reinsurer, ensuring that profits are taxed on a consistent basis. By protecting the Exchequer in such a way, this measure will increase receipts by £50 million to £60 million per annum.

Clause 31 addresses an industry concern that the current scope of the legislation, which treats certain sums received under a reinsurance contract as taxable income, may be unnecessarily wide and is blocking commercial transactions. It amends section 92 of the Finance Act 2012 so that it does not apply where substantially all the insurance risks of a book of BLAGAB are reassumed by a reinsurer.

Clause 32 addresses the corporation tax consequences that could otherwise arise when an insurer’s liabilities are written down under proposed new section 377A of the Finance Services and Markets Act 2000, and when there is any subsequent write-up under proposed new section 377I of FSMA. Without the clause, any release of liabilities could lead to an undesirable additional tax charge, which would reduce the balance sheet benefits of the write-down. The changes therefore help to ensure that the ailing insurer avoids insolvency. The clause also prevents the insurer from claiming a tax deduction where a write-down order is subsequently varied or terminated, which ensures that when an insurer recovers, the overall impact of the clause is tax neutral.

Clause 33 will extend the circumstances in which a pre-6 April 2015 lifetime annuity or a dependants annuity under a registered pension scheme can be reduced under a section 377A write-down without incurring unauthorised payments charges. This will ensure that those who receive financial services compensation scheme top-up payments, following a write-down under proposed new section 217ZA of the Financial Services and Markets Act 2000, will not face a tax disadvantage.

These clauses address a possible mismatch within the life insurance tax rules and clarify the scope of existing legislation, facilitating commercial transactions and protecting vital Exchequer revenue. They also ensure that write-down orders are a viable option for insurers in financial distress, and do not cause any additional tax liability for either the insurer or the individuals who hold policies with those insurers. I therefore recommend that the clauses stand part of the Bill.

Photo of James Murray James Murray Shadow Financial Secretary (Treasury)

As we have heard, clause 30 applies to reinsurers of specific types of long-term insurance businesses known as basic life assurance and general annuity businesses, or BLAGAB. This is a technical change that addresses a tax mismatch in the life insurance rules where reinsurance precedes a transfer of BLAGAB. In that situation, the clause classifies the reinsured business as BLAGAB in the hands of the reinsurer.

We recognise that when books of life insurance policies are transferred between insurers, the economic transfer is typically effected by a reinsurance contract, pending court approval of the transfer. That gives the purchaser the economic benefits of the acquisition immediately. As we know, a tax mismatch can arise, as the profits from the business are initially taxed in the hands of the cedant as BLAGAB, then in the hands of the reinsurer as non-BLAGAB and, finally, after the business transfer scheme occurs, in the hands of the reinsurer as BLAGAB once again. A loss of tax can occur if a non-BLAGAB trade loss arises for the reinsurer and is offset against total profits or surrendered as group relief. The clause resolves that anomaly by ensuring that any profits or losses from the reinsured business that arise to the reinsurer are within BLAGAB. The ensuing result is that any trade profit or loss in the reinsurer will be subject to the BLAGAB rules, which accordingly brings the tax treatment of the reinsurer in line with the seller of the business.

We will not oppose this measure. For completeness, however, I would be grateful if the Minister could confirm the Exchequer impact of the measure, as it was not included in the original policy paper published on 15 December last year. We recognise that, as the policy paper points out, a consultation was not conducted due to the risk of forestalling. We also recognise that the amendments to eliminate the possibility of a mismatch will apply from 15 December last year, regardless of when the reinsurance contract was entered into.

The policy paper states that the final costings for the measures will be subject to scrutiny by the Office for Budget Responsibility and set out at the next fiscal event. For absolute completeness and to ensure that the information is on the record and easily available as we consider the clause, I would be grateful if the Minister confirmed what the Exchequer impact up to 2027-28 is now estimated to be.

Moving on, clause 31 makes a technical amendment to existing legislation to address industry concern that the scope of section 92 of the Finance Act 2012 may be unnecessarily wide. Where life insurance companies reinsure blocks of BLAGAB, it is possible that amounts received under the reinsurance might be treated as deemed income within I-E. That uncertainty has inhibited commercial transactions. As the Minister set out, this technical amendment excludes amounts from the operation of section 92 of the Finance Act 2012 where sums are paid under a reinsurance contract and substantially all the insurance risks relating to a group of policies are reinsured. We will not oppose this measure.

Clause 32 operates alongside clause 33, which I will come to in a moment, to help to deliver the policy intent of the amendments to be made through the 2022 Financial Services and Markets Bill, which seeks to support insurers in financial distress by averting the tax implications for insurers and for policyholders. This clause addresses the corporation tax consequences that would otherwise arise when an insurer’s liabilities are written down under the proposed new section 377A of the Financial Services and Markets Act 2000 and any subsequent write-up. This primary legislation will apply from the date of Royal Assent. We will not oppose clause 32.

Finally, clause 33, which operates alongside clause 32, as I mentioned, extends the circumstances in which a pre-6 April 2015 lifetime annuity or dependents annuity under a registered pension scheme can be reduced without incurring unauthorised payment charges. That will ensure that those who receive financial services compensation scheme top-up payments as a result of the write-down under the Financial Services and Markets Bill’s proposed new section 217ZA of the Financial Services and Markets Act 2000 will not face a tax disadvantage. The primary legislation for those pensions tax changes will also apply from the date of Royal Assent of this Finance (No. 2) Bill, while additional consequential pensions tax changes concerning unauthorised payments will be made via a statutory instrument. We will not oppose clause 33.

Photo of Angela Eagle Angela Eagle Labour, Wallasey 11:00, 16 May 2023

We often plead for financial services legislation to be made simpler, but from listening to the debate, it seems that we have not quite succeeded yet. I have a few questions, but the changes seem to be sensible; they ensure that there is no game-playing when it comes to reinsuring those bits of business that might need to be transferred from an ailing or failing insurance company to something stronger, so that those who rely on payments for their pensions or other costs can be assured that they will not lose out.

Have these technical changes been proposed as a result of an issue in the insurance world? Do insurers who wish to join larger companies or pass on some of their insurance policies want to do so because they thought that they had a tax advantage, and have buyers not been wanting to buy because they think that they might be left holding the baby, and face a big tax issue? Is this a structural problem, or does the Treasury see this as a potential problem that it wants to iron out before it manifests in the market? I suppose that is the question I am asking. If we are talking about a problem that has been holding up the efficient working of the market, what will the effect of the change be? Will it be beneficial? Has the Treasury modelled it, so that it knows the implications of the change? I am trying to get a handle on whether this is a theoretical issue, or whether there is an actual problem that has led to these changes, which seem sensible, if complex.

Photo of Victoria Atkins Victoria Atkins The Financial Secretary to the Treasury

First, in answer to the hon. Member for Ealing North, the Exchequer impact is plus-£15 million for 2022-23—all the figures are positive—plus-£50 million in 2023-24, plus-£55 million in 2024-25, and the same for 2025-26 and 2026-27. That is how long the measure has been scorecarded for. The hon. Member for Wallasey asked whether the risk was possible or actual. We legislated before significant further risk could arise on the adoption of the new accounting standard, IFRS 17.

Clause 30 addresses a possible tax mismatch in the BLAGAB reinsurance rules. Clause 31 addresses a matter brought to HMRC’s attention by the insurance sector, which has a long-standing concern that the current scope of the legislation, which treats certain sums received under a reinsurance contract as taxable income, may be unnecessarily wide and is blocking commercial transactions. In relation to the hon. Lady’s laments about the simplification of financial services legislation, I speak with the scars of having tried to prosecute insider dealing cases in my time, so I can understand why she asks about that.

Question put and agreed to.

Clause 30 accordingly ordered to stand part of the Bill.

Clauses 31 to 33 ordered to stand part of the Bill.