Basic info - blagab non-blagab

[Arush]

Hi, I am struggling to conceptually understand the blagab and non-blagab taxations. Can someone provide a simple example (numerical, really find the examples with variables not useful) how these tax methods work? also, why for a mutual company, usually non-blagab profits wouldn’t exist? It would also be useful if the minimum profit concept can be explained via the example. I’m unable to also understand how minimum profit helps in splitting policyholder and trading profits as well as if I-E is less than min profit, then it is modified to make it equal to min profit. I’m not living in the UK so probably not well-versed with these concepts, and really in need of a simple explanation, which somehow appears missing in the core reading.

 

[Lindsay Smitherman]

Don't worry, you aren't disadvantaged by not being UK based - this is a difficult area for most! That's why we have included lots of numerical examples in both Chapters 6 and 7 to help explain these ideas. If you work through those, together with Practice Questions 7.2 and 7.3, they will help you to understand these points.

Just to pick up on your specific points:

Non-BLAGAB profits (and BLAGAB minimum profit) are the trading profits earned by shareholders. Mutuals don't have any shareholders, so don't make any shareholder profit.

The splitting of the taxable amount using minimum profit is covered in the numerical examples in the course notes. [If a proprietary company is XSE (ie minimum profit > I-E) then we simply have taxable amount = minimum profit and it is all taxed as 'shareholder profit'; there is no 'policyholder profit' component in that situation.]

 

[Arush]

Hi, thanks. Unfornutalety, tried reading through the notes again but it doesn't seem clear enough. Unable to understand what are the differences between these 2 approaches. Which approach includes and how is it different, for example, what's trading profit under non-BLAGAB and how's it different to I-E in BLAGAB? Again the minimum profit term is not clear really, why is it required? I am sure there's a very simple and valid reason but the course notes don't seem to help me. In addition, the example in the appendix also seems strange. For instance, where is the PH tax of 10 coming from, because if you put the whole equation in excel, that leads to circum error. Would be really helpful if some additional information (in a simpler way than the notes) could be shared here.

 

[Lindsay Smitherman]

It sounds like you do not have the latest version of the SA2 course notes, which might not be helping. There is no longer an Appendix to the tax chapters so you can disregard that.

Picking up on your other points:
Trading profit under non-BLAGAB: see Chapter 6 Section 4.3 and Chapter 7 Section 1.3 (sub-heading Non-BLAGAB) for descriptions of what this is.
I-E in BLAGAB: the calculation of I minus E is described in detail in Chapter 7 Section 1.3 (sub-heading BLAGAB) and can be seen to be very different from a profit calculation.

As is described in Chapter 6, Section 4.4, the minimum profits test has two purposes:

• determining the taxable amount in the BLAGAB fund, since taxable amount = maximum (I - E, minimum profit)
• splitting the above taxable amount into the shareholder share (= minimum profit) and the policyholder share (= any excess of I-E over minimum profit) so that they can be taxed at different tax rates
• in the UK, shareholder share is taxed at corporation tax rate, to be consistent with other types of company (where basically profit is taxed at the corporate tax rate)
• and policyholder share is taxed at basic rate of income tax, noting that (as described in Chapter 7) the p/h only pays tax on their 'profit' (= excess of benefits received over premiums paid) at the excess of their marginal rate over this basic rate, so these two amounts combine to form the 'correct' amount of tax payable at the marginal rate

 

[Arush]

Don't worry, you aren't disadvantaged by not being UK based - this is a difficult area for most! That's why we have included lots of numerical examples in both Chapters 6 and 7 to help explain these ideas. If you work through those, together with Practice Questions 7.2 and 7.3, they will help you to understand these points.

Just to pick up on your specific points:

Non-BLAGAB profits (and BLAGAB minimum profit) are the trading profits earned by shareholders. Mutuals don't have any shareholders, so don't make any shareholder profit.

The splitting of the taxable amount using minimum profit is covered in the numerical examples in the course notes. [If a proprietary company is XSE (ie minimum profit > I-E) then we simply have taxable amount = minimum profit and it is all taxed as 'shareholder profit'; there is no 'policyholder profit' component in that situation.]

If a company is XSE, there would be no policyholder profit, but don’t the policyholders have to pay at least the basic rate of tax when they receive these benefits, example an endownment plan.

 

[Em Francis]

If a company is XSE, there would be no policyholder profit, but don’t the policyholders have to pay at least the basic rate of tax when they receive these benefits, example an endownment plan.

A company will base these calculations on a fund basis, not an individual basis.