A: Where a company other than a life insurance company is a party to an “investment life insurance contract” it is treated as a loan relationship of the company by virtue of s 562 CTA 2009. This is discussed further in the HMRC manual at IPTM3900. So the chargeable event gain rules applicable for income tax do not apply for corporation tax. Following on from this the top-slicing relief provisions that apply for income tax are not relevant for corporation tax. Top-slicing relief (which averages gains over the years that it has accrued to give relief from the higher rates of tax in a single year) is only available to individuals (s 535(1) ITTOIA 2005).
The tax treatment of life insurance contracts follows the accounting treatment. The accounting treatment depends upon the accounting standards used by the company. For small companies they can opt to use historic cost principles so there is no annual revaluation and no annual adjustment. The profit or loss will then only be reflected in the accounts on maturity or disposal and be treated as a loan relationship at that time.
For most companies fair value accounting will apply and there will be annual profits or losses on a life insurance contract in addition to the result on the maturity or disposal of the contract.
As for income tax there is a “tax credit” for the underlying tax which is described in the legislation as the “relevant amount”. The gain is grossed up at a rate which equates to basic rate tax. The “tax credit” is not repayable but will discharge the tax due on the life insurance contract. A company liable to tax at a rate of 20% or less will have no tax to pay on a life insurance contract gain. Companies liable to tax at more than the basic rate of income tax for personal tax will have additional corporation tax to pay.
Where tax is treated as having been paid it is set against the company’s liability to corporation tax for the accounting period in which the transaction arose. IPTM3920 confirms that if the tax treated as paid exceeds the corporation tax liability for the year the excess is not repayable and it cannot be set off against tax in any other accounting period. The tax treated as paid is entered in box 555 (Life assurance company tax credit) of the company’s CT600. However, any excess tax treated as paid must be excluded from box 555 so that no tax repayable includes tax treated as paid.