Hi I have two questions on chapter 9 and was hoping someone could help me please. 1. On page 5, the core reading on the I element of I-E (BLAGAB) says "Dividend income from equities (both UK and overseas) is excluded as this is already deemed to have suffered tax." Then, on page 12, there is a sentence of acted text 3rd paragraph from the top that says "the dividend income referred to here is the BLAGAB dividend income only" Please can someone explain how these 2 points relate to each other? 2. On page 13, question 9.5, it is given in the question that "Dividend income received ("net") is 80" so it seems like this is the franked income but then later on in the question it implies that the franked income is 50 (300-250). Why is this so? Thanks.
The page 12 Core Reading says that there are special provisions for dividend income which does not suffer further tax. This is true for BLAGAB business only, hence the ActEd comment which you refer to. This is consistent with page 5 which also considers BLAGAB business. However, when we perform the minimum tax test we need to consider both GRB (mostly this is pensions business and so we don't say much about it in SA1) and BLAGAB business. GRB dividends are taxed, so the Core Reading on page 12 is referring only to BLAGAB dividends. Yes, the 80 is the total dividends paid to the insurer, so is franked income. And yes, the 50 is also franked income. The difference occurs because we need to allocate the dividends between shareholders and policyholders. The NCI profit belongs to shareholders. The I-E is biger than the NCI profit, so the excess belongs to policyholders. In this example we have also split the dividends 50 to shareholders and 30 to policyholders. The method used to allocate dividends between policyholders and shareholders is complex and thankfully beyond the syllabus. I hope this helps. Best wishes Mark
That makes sense. Can I please clarify a point on the minimum tax test. The notes on page 14 (last paragraph) say that: "If NCI profit is positive, it is then compared with the result of an adjusted I-E computation. The adjusted I-E is the I-E result plus the BLAGAB share of divided income" Does that mean we now include the franked dividends? Would that not be taxing the dividends twice? Why is this so? Thanks.
The dividends are included when the minimum tax test is performed, but only to see which is largest (NCI profit or adjusted I-E). The insurer still pays no tax on the dividends. Chapter 9 page 19 goes on to say that: "If a company is not excess E then: • an amount of the I–E equal to that part of the NCI profit not derived from dividends is taxed at 28% • the balance is taxed at 20%. If a company is excess E: • the I–E is all taxed at 28%. Remember that when the NCI test bites, I–E is altered so that it equals the NCI profit. In both cases the I–E value is that originally calculated, and so excludes any dividend income." So we add the dividends on to perform the minimum tax test only to take them away again when we calculate the tax. I agree that this is very messy, but these are the rules HMRC have come up with. The logic is that NCI profit includes dividends, so for the sake of comparison we need to include dividends in the adjusted I-E too. However, we then take dividends off to avoid double taxation. I hope this helps to clarify this. Best wishes Mark
