Blagab and \non-blagab classification

[Shahzad nazir]

Hi
Could anyone list the products which falls under BLAGAB only?
I understand protection business is no more BLAGAB under new rules.
Thanks

 

[Mbotha]

Hi Shahzad

See the post called "Minimum Profits Test".

Also protection business written before 1 January 2013 (it is only protection business written since then which is in the non-BLAGAB fund for taxation purposes), plus life assurance business written as savings rather than protection e.g. endowment assurances, whole life assurances.

 

[Shahzad nazir]

Hi Shahzad

See the post called "Minimum Profits Test".

Thanks Mbotha

 

[pchote]

Single-premium unit-linked with small death benefit would be considered as protection business and be classified as non-BLAGAB after Jan 2013?

 

[Lindsay Smitherman]

Hi: this type of business would probably not be categorised as "protection business" and so would continue to be classified as BLAGAB. As set out in Chapter 6 Section 1.1, for taxation purposes:

“protection business” is broadly defined as any long-term insurance contract "under which the benefits payable cannot exceed the amount of premiums paid, except on death or in respect of incapacity due to injury, sickness or other infirmity".

Under a single premium unit-linked product, the benefits payable on maturity (if relevant) and on surrender would normally exceed the amount of premiums paid (due to investment return being added over time), and therefore it does not meet the above definition of "protection business".

 

[Naimin Patel]

Hi,

Could anyone please explain why it states that the impact for companies having old business taxed as non - blagab trading profits is likely to be neglible? I don't understand why it isn't a significant difference between a company that chooses to elect all business being non blagab and a company that continues with blagab on pre 2013 plans and non blagab thereafter, all else being equal.

Thanks

 

[Lindsay Smitherman]

Hi

Note that this statement is made in connection with companies "which have only ever written protection business", and which can therefore elect to have their business classified as non-BLAGAB.

Protection business typically has high E (eg underwriting expenses, commission) and low I (due to holding relatively low reserves for this type of business). Therefore companies which have only ever written protection business are likely to have the BLAGAB minimum profits test biting, since it is likely that profit > I-E. If the minimum profits test bites, the fund is taxed on profit (not I-E).

Hence electing to have their business classified as non-BLAGAB, and so being taxed on profits, is not likely to have an impact - because they were already likely to have been taxed on profits.

Hope that makes sense?

 

[gruhaa]

Hi Lindsay
I have a very fundamental question. Just like in Non-BLAGAB business, we also receive Premium, pay claims etc under BLAGAB business. So how the premium(P) , claim(C), and other factors likel(V1-V0) and (D1-D0) are included in taxable calculation of BLAGAB business.
My understanding is BLAGAB taxable income, using notations given under NON-BLAGAB taxation, is calculated as (I'+A'-E-L).
Could you please help me in understanding this point correctly.
Another question is why under Mutual, there is less likely to have NON-BLAGAB profit?

 

[Lindsay Smitherman]

Just like in Non-BLAGAB business, we also receive Premium, pay claims etc under BLAGAB business. So how the premium(P) , claim(C), and other factors likel(V1-V0) and (D1-D0) are included in taxable calculation of BLAGAB business.
My understanding is BLAGAB taxable income, using notations given under NON-BLAGAB taxation, is calculated as (I'+A'-E-L).
Could you please help me in understanding this point correctly.

Hi - Chapter 7 Section 1.1 explains that {I-E} = Shareholder profit + Policyholder profit.
"Shareholder profit" is as you see for the non-BLAGAB profit calculation. "Policyholder profit" is the excess of benefits received over premiums paid, and needs to be taxed within the company because policyholders themselves do not pay any tax on these benefits (unless they are a higher rate taxpayer) - and for BLAGAB business the tax authorities want to get the tax from somewhere.

Another question is why under Mutual, there is less likely to have NON-BLAGAB profit?

Mutuals don't have shareholders, so don't make any taxable shareholder profit. Any surpluses arising will be passed back to the policyholders, resulting in higher reserves or higher claims.

Hope that helps.

 

[gruhaa]

Hi - Chapter 7 Section 1.1 explains that {I-E} = Shareholder profit + Policyholder profit.
"Shareholder profit" is as you see for the non-BLAGAB profit calculation. "Policyholder profit" is the excess of benefits received over premiums paid, and needs to be taxed within the company because policyholders themselves do not pay any tax on these benefits (unless they are a higher rate taxpayer) - and for BLAGAB business the tax authorities want to get the tax from somewhere.



Mutuals don't have shareholders, so don't make any taxable shareholder profit. Any surpluses arising will be passed back to the policyholders, resulting in higher reserves or higher claims.

Hope that helps.

HI Lindsay
Thanks for your explanation. I have few follow-up questions, as below:
1. The surplus you just mentioned above shouldnt be captured for taxing purpose? Surplus(I-E) arising over a year is what the taxable income is? . Now if that surplus after tax is distributed as bonus shouldnt that be another side?
2. It's a new ques. Would it be possible to have negative minimum profit but positive I-E computation. If yes, can you explain that situation and how it will be taxed. Also in case where E is restricted due to minimum profit is higher than (adjusted I-E) computation. Will that restricted E be added in the expenses in the calculation of minimum profit or in the expenses of (I-E) computation?

 

[gruhaa]

HI Lindsay
Thanks for your explanation. I have few follow-up questions, as below:
1. The surplus you just mentioned above shouldnt be captured for taxing purpose? Surplus(I-E) arising over a year is what the taxable income is? . Now if that surplus after tax is distributed as bonus shouldnt that be another side?
2. It's a new ques. Would it be possible to have negative minimum profit but positive I-E computation. If yes, can you explain that situation and how it will be taxed. Also in case where E is restricted due to minimum profit is higher than (adjusted I-E) computation. Will that restricted E be added in the expenses in the calculation of minimum profit or in the expenses of (I-E) computation?

HI Lindsay
I have found the answer to my second ques above.
I would request you to help me in understanding first point.

 

[Lindsay Smitherman]

Sorry, I am not sure that I understand your first question. Perhaps you could restate it, clarifying whether you are asking about BLAGAB or non-BLAGAB, and mutuals or proprietaries? Thanks

 

[gruhaa]

Hi
My question is around Non-BLAGAB. Why cannot we consider (I-E) computation for this business as well? And any positive (I-E) would be the surplus and after deducting the tax, it can be used for bonus declaration. This is what i understood and hence having NON-BLAGAB Profit under Mutual.

 

[Lindsay Smitherman]

Thanks for clarifying.

Non-BLAGAB business is taxed on shareholder profit. (Which is zero in a mutual.)
BLAGAB business is taxed on {I - E}, which is shown in the Core Reading to equal the total of shareholder profit and policyholder profit.

Normally companies (thinking wider than just insurance companies) are taxed on shareholder profit. So the approach to the Non-BLAGAB fund is consistent with this.

However, there is a 'special' rule in place for BLAGAB business, which means that an extra amount over and above shareholder profit may also be taxed. This is the 'policyholder tax' mentioned above, and takes the taxable amount up to I-E (if higher than the minimum profit measure). Policyholders need to be taxed on their own 'profits', broadly the excess of benefits received over premiums paid. This is done by having the life insurance company pay this tax at the basic rate of taxation (and this will be loaded into the premiums being charged to the policyholders), and the policyholder pays the excess directly themselves if they are a higher rate taxpayer.

The additional 'policyholder tax' amount is not relevant to the Non-BLAGAB fund because the business written in that fund is tax advantaged: the policyholder doesn't have to pay any tax on the benefits (eg pensions, ISAs). Hence there is no extra 'policyholder tax' amount on which tax has to be paid by anyone, and so Non-BLAGAB business is taxed on just shareholder profit (as for any other company) rather than the total of 'shareholder profit' + 'policyholder profit' = I-E.

Hope that makes sense as background. Having said all that, I would recommend focussing on what the rules are, rather than worrying too much on why they are what they are!