NON-BLAGAB and BLAGAB

Hi: I have answered this in another post, see:
https://www.acted.co.uk/forums/index.php?threads/blagab-and-non-blagab-classification.13742/

Basically:
- The tax authorities aim to tax all companies in the same way (that is, all types of companies - not just insurance companies), by taxing the company's 'profit'.
- This means 'shareholder profit'.
- Mutuals don't have any shareholders, so shareholder profit = 0.

- Non-BLAGAB business is taxed like other companies, i.e. by taxing the shareholder profit arising on that business.
- So for mutuals, non-BLAGAB tax is zero.

- BLAGAB business is slightly different: it is taxed on I-E.
- I-E can be shown to equal 'shareholder profit' + 'policyholder profit' (this is explained in the course notes).
- So BLAGAB business is taxed on shareholder profit (like for all other companies) plus possibly a bit of extra amount of taxation, i.e. the 'policyholder profit' element (if this is >0).
- Policyholder profit (broadly speaking) = benefits received - premiums paid.
- The tax authorities want policyholders to be taxed on this gain that they have received on their BLAGAB policies - but the policyholder doesn't pay all of that tax directly themselves.
- The insurance company pays tax on the gain at the basic policyholder tax rate; if the policyholder is a higher rate taxpayer they have to pay the extra amount of tax themselves.
- The bit that the insurance company pays is the tax on the 'policyholder profit' part of I-E taxation for BLAGAB business

- Business written in non-BLAGAB funds is not taxable on {benefits - premiums} from a policyholder perspective (it comprises tax advantaged products, like pensions and ISAs), so 'policyholder tax' = 0.
- Therefore non-BLAGAB funds are taxed purely on shareholder profit (if there is any).

 

No - see comment above:
"The insurance company pays tax on the gain at the basic policyholder tax rate; if the policyholder is a higher rate taxpayer they have to pay the extra amount of tax themselves."
The company pays tax on I-E. I-E = shareholder profit + policyholder profit. The company pays tax on shareholder profit at the corporation tax rate and pays tax on policyholder profit at the policyholder's base rate. The policyholder then pays any extra tax due at their marginal rate minus the base rate (so only have to pay tax if they are a higher rate taxpayer).

 

There are lots of different ways that tax advantaged products work. The couple of examples in the Core Reading are just illustrations of how this might be done - it will vary by jurisdiction and by product.

The products written into the non-BLAGAB fund all have gross roll-up (gross investment return). Further tax benefit may come from being able to pay premiums out of pre-tax income (but being taxed on part of the benefits) - eg pensions business, or alternatively from having to pay premiums out of post-tax income but having the benefits payable tax-free - eg ISAs. Because the tax-advantaged treatment of premiums and benefits varies by product, it doesn't make sense for the company to pay tax on the 'policyholder profit' item: any taxable 'policyholder profit' amount varies by product, plus we need the investment return roll-up in the fund to be non-taxed. So the taxation of the benefits or tax relief on premiums (whichever is applicable to whichever non-BLAGAB product) is dealt with solely through the policyholder's personal taxation.

Thus there is no 'policyholder profit' on which the company is taxed for the non-BLAGAB products.

 

Yes - that is correct!

The application of the Lifetime Allowance makes this a little bit complicated, but ignoring that (and you wouldn't be expected to know exactly how that applies), then the individual only pays tax on the remaining 75% when they receive the money, either from an annuity or as a drawn-down capital amount. If they choose to purchase a pensions annuity, the amount of money that they use to do this is not taxed, but the individual will be taxed on the annuity amounts as income.

Hope that helps?

 

Hi

With-profits products are not treated distinctly: they are taxed as BLAGAB products if they are life assurance savings products, and as non-BLAGAB products if they are pensions products. This is the same whether the products are conventional without-profits, unit-linked or with-profits.

 

Hi

The second of your statements is the correct version.

The sentence in the Core Reading is: "Here, claims can be considered to be increases in policy reserves plus a claim payment in excess of the opening policy reserve." This is in order to justify the simplification of the profit formula to just P+I-E-C, for the purposes of explaining the origins of I-E taxation.

For policies which are still in force at the end of the period, the "claim" (C) in the simplified profit statement could be considered to be the increase in policy reserves over the period. For policies which have become a claim during the year (eg the policyholder died), the "claim" could be considered to be the excess of the claim payment over the start-of-period reserve held for that policy. So it is talking about different situations and hence there is no double-counting.

Hope that helps.

 

Sort of. "C" is normally used to mean actual claims paid, so "qxC" might be better expressed as "qxS" where S is sum assured, say. But also bear in mind that claims are payable not just on death: also on surrender and even on survivorship - so the "q" might be a bit misleading here.

Therefore you might find it easier to think of it as being the sum of the following over each individual policy:
{V1-V0} if policy in-force at year end and no claim paid out
{C-V0} if policy not in-force at year end and claim paid out

 

If a company is in an XSE position then they will have losses to carry forward on their BLAGAB business, which they can use to offset their I in the next year's I-E calculation. The exact rules around what can and cannot the losses offset are not within the SA2 Core Reading.

 

All you need to know for non-BLAGAB losses is what is in the Core Reading:
Accounting losses can be used to offset profits in other tax years or in other companies within the group, subject to some restrictions.