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).
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