Hi, I am confused with question 7.2 & 7.3 answer (as well as explanation in page 8 BLAGAB) example q7.2: BLAGAB I-E = 520 BLAGAB profit * = 250 Non-BLAGAB profit = 260 The questions asking amount of tax payable by insurer. Sol = (260+250)*0.25 + (520-250)*0.2 From page 8 explanation, it says The shareholder profit part of the taxable amount is taxed at the corporation tax rate (25% from April 2023 for most companies) and the policyholder profit part is taxed at the basic rate of income tax (20%). 1. Why do we count in p/h profit part (with tax rate 20%)? I thought p/h already paid tax on investment earnings at 20%, and benefit in excess of premium paid at {marginal income tax rate - basic income tax rate} "the policyholder profit part is taxed at the basic rate of income tax (20%)." doesn't mean tax that p/h should pay? 2. Why (520-250)? I don't see any explanation about the excess of I-E over min profit is taxed at p/h rate Thanks
Be careful here, we are specifically referring to those products which fall under BLAGAB business, eg endowment assurances, where the investment earnings within the insurer (net of expenses) are taxed at 20% and this is paid by the company - although this is then normally passed onto the policyholder via the premium/charging basis. Higher rate tax payers, ie those whose marginal tax rate is greater than 20%, will then be subject to an additional tax charge. This is achieved through taxing policyholders of these products on the excess of benefits received over premiums paid, at their marginal rate minus the 20% base rate. So higher rate tax payers will be subject to this extra charge (since their marginal rate is higher than 20%), with this normally being collected directly from them through their annual tax returns. This is one of the objectives of the I-E test, 'to split profit made between shareholder and policyholder and pay the appropriate tax rate on each'. The minimum profit resembles trading profit and so should be taxed just like any other trading company's profits, ie via corporation tax. The remaining is then the investment profit made from policyholders' investments and should be taxed via policyholder tax. This is explained in Chapter 6 (Section 4) of the course.
