NON-BLAGAB and BLAGAB

[gruhaa]

Hi

Can anyone please explain why cannt we tax the NON-BLAGAB business as I-E in case of mutual(or do minimum profit test in case of proprietary) . Why is it just trading profit considered under non-BLAGAB business, bcz as I understood, a mutual company can sell pension products and earn investment return and incur expenses. Why the (I-E) profit is consider to be 0. I am not getting the overall purpose of such taxation where some part of profit is taxed at corporation tax rate and some sat policyholder tax rate. And why the same thing is not followed in both the businesses?

 

[Lindsay Smitherman]

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).

 

[gruhaa]

Thanks

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 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).

Thanks Lindsay. Your explanation is really helpful.
I have another follow up question:
1. In the last paragraph, you said NON-BLAGAB comprises of 'only' tax advantaged products. There are two ways to get tax advantages in benefit: Gross Rollup of invesinvest return but ultimately benefit will be taxed and second is investment return roll up net of tax but benfit is tax free in hand of policyholder(as given in chapter 5). In both the cases, policyholder have to pay tax then how is that there in no policyholder profit under non-BLAGAB business?
2. Did you mean that the policyholder tax we calculate under BLAGAB business for proprietary company is the tax polciyholder will pay when he receives the benefit?

 

[GauravT]

Hi Lindsay,
Your explanation helps a lot. I have one question on this:
So just to conclude, can we say that if mutual company writes pension products only, then it will not pay any tax and policy holder will pay tax on the benefits they received as per their individual tax rates subject to the availability of taking 25% lump sum tax free?
Also, if policy holder takes 25% lump sum tax free, then will he pay tax on remaining 75% before vesting that money into annuities for receiving pension which further will be taxed as income of an individual?
I have another unrelated question:
I read your post where you said "life assurance business written as savings rather than protection e.g. endowment assurances, whole life assurances." is BLAGAB. Does this holds only for without profit products? As I understand the with profit products are like ISA and are non-BLAGAB?
Thanks

 

[Lindsay Smitherman]

2. Did you mean that the policyholder tax we calculate under BLAGAB business for proprietary company is the tax polciyholder will pay when he receives the benefit?

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).

 

[Lindsay Smitherman]

1. In the last paragraph, you said NON-BLAGAB comprises of 'only' tax advantaged products. There are two ways to get tax advantages in benefit: Gross Rollup of invesinvest return but ultimately benefit will be taxed and second is investment return roll up net of tax but benfit is tax free in hand of policyholder(as given in chapter 5). In both the cases, policyholder have to pay tax then how is that there in no policyholder profit under non-BLAGAB business?

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.

 

[Lindsay Smitherman]

So just to conclude, can we say that if mutual company writes pension products only, then it will not pay any tax and policy holder will pay tax on the benefits they received as per their individual tax rates subject to the availability of taking 25% lump sum tax free?

Yes - that is correct!

Hi Lindsay,
Also, if policy holder takes 25% lump sum tax free, then will he pay tax on remaining 75% before vesting that money into annuities for receiving pension which further will be taxed as income of an individual?

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?

 

[Lindsay Smitherman]

I read your post where you said "life assurance business written as savings rather than protection e.g. endowment assurances, whole life assurances." is BLAGAB. Does this holds only for without profit products? As I understand the with profit products are like ISA and are non-BLAGAB?

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.

 

[GauravT]

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?

Yes it does. Thanks a lot

 

[gruhaa]

Yes it does. Thanks a lot

Hi Lindsay,

In chap 7, pg 3, first line says 'Claim can be considered to be increase in policy reserve (say, V1-V0) plus a claim payment in excess of opening policy reserve(C-V0). That means, it is V1+C-2V0.
In chap 6, under non-BLAGAB taxation formula, it is given as (C+V1-V0)
Cab you help me what this line is trying to say and how it is different from C+V1-V0?

Thanks
alok

 

[Lindsay Smitherman]

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.

 

[gruhaa]

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.

You mean it is like V1-(px) *V0+C*qx-qx*V0
which will give me:V1-V0+qxC

 

[Lindsay Smitherman]

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

 

[Arush]

How is the loss carry forward treatment different under blagab and nonblagab? Blagab calls it as xse I believe. Is it that the nonblagab losses can be offset against any lines of business but blagab losses or excess expenses can only be offset against blagab business?

 

[Em Francis]

How is the loss carry forward treatment different under blagab and nonblagab? Blagab calls it as xse I believe. Is it that the nonblagab losses can be offset against any lines of business but blagab losses or excess expenses can only be offset against blagab business?

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.

 

[Arush]

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.

And for nonblagab, the losses can be offset against past / current / future profits as well, right? So in terms of offsetting, both regimes offer similar benefits?

 

[Em Francis]

And for nonblagab, the losses can be offset against past / current / future profits as well, right? So in terms of offsetting, both regimes offer similar benefits?

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.