CH9 (long term insurance co tax) queries

Discussion in 'SA1' started by mossie, Aug 10, 2017.

  1. mossie

    mossie Member

    Hi,
    I have a few questions on CH9 (long term insurance co tax) and would be great if someone could shed some light.

    1. p17 - paragraph 1: 'The minimum profit is effectively the accounting profit arising from BLAGAB (including BLAGAB share of non-taxable dividends), after adjustment for current and deferred tax on policyholder “IE” items. '.
    a) is this 'accounting profit' arising from BLAGAB calculated as per the formula given on p19 (i.e. P-C+I-E-(V1-V0)+(D1-D0) )?
    b) what exactly is the 'current and deferred tax on policyholder I-E items'? and how is it calculated? Is this amount deducted from the accounting profit arising from BLAGAB?​

    2. p17 - paragraph 2: 'This BLAGAB share of dividend income is included as a net figure, with no grossing up.'
    What does the underlined part mean?
    ​
    3. p20 - paragraph 2, 2nd point of core reading: 'the balance is taxed at the policyholder rate.'
    Is this balance calculated as:
    a) (I-E) - (Minimum Profit - BLAGAB share of equity dividend income), or
    b) (adjusted I-E) - (Minimum Profit - BLAGAB share of equity dividend income), where (adjusted I-E)= (I-E)+BLAGAB share of equity dividend income?​

    4. p23 - About the first two paragraphs - the first saids increasingly policies are written as split trust, while the second saids trust law does not allow a policy to be written split trust, and trust can only be used when 100% of the death benefit is paid when a CI is contracted. Are they trying to point out that accelerated CI policies are written outside trust? If not, what are they trying to say here?

    Further, why does this route leave a grey area when the policyholder dies after contracting a CI but not claiming the CI benefit? why is this considered tax avoidance? Shouldn’t the beneficiary claim a death benefit (as opposed to a CI benefit) if the policyholder dies?

    Many thanks!

    M.


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    mossie, Aug 10, 2017
    #1
  2. Sarah Byrne

    Sarah Byrne ActEd Tutor Staff Member

    Hi mossie

    In response to your questions:

    1a – yes, it would just be the profit which could be calculated as you suggest.
    1b – there may have been an adjustment for accounting tax in the minimum profits and so to make this comparable with I-E this would need to be added back in (ie minimum profits adjusted for it). This tax could be related to the current year, or tax that has been deferred from previous years (eg unrealised gains). Anything beyond this would not be within the scope of the SA1 exam.

    2 – net just means post tax, so we don’t add the tax back in (grossing up).

    3 – the balance is (I-E) – (minimum profit – BLAGAB dividend income), so our first suggestion.

    4 – this is saying that we can’t have a policy where some of the proceeds are payable on CI and some on death written as a trust. If it is going to be written under a trust, all the benefit must be paid on CI or death. So, an accelerated CI policy is fine. But, a CI policy as a rider to term assurance where the CI benefit could pay out first and the term assurance then pays out later, is not OK. If an ACI policy is written as a split trust, if the benefit is paid on CI the benefits can be paid to the policyholder, but if they are paid on death it is paid outside the policyholder’s estate, so not IHT is incurred.

    Hope this helps. You won't find any past paper questions on BLAGAB tax in SA1, but the non-BLAGAB formula came up a couple of years ago.

    Sarah
     
    Sarah Byrne, Aug 18, 2017
    #2
    Lindsay Smitherman likes this.

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