How do life companies get taxed? Is it on investment income less expenses or a tax on profits or tax?
That's probably more of an SA2 question where there are specific chapters dealing with the taxation of life companies. In brief: Basic Life Assurance and General Annuity Business is taxed on Investment Income less Expenses (excluding UK dividends) and Pensions Business is taxed on profits.
Thanks for your answer. So is there an incentive for life assurance and annuity business to invest in assets with low returns (like cash) so that Investment Income less expenses is negative which could imply no tax?
I doubt that that would be desirable, as competition,product design, meeting policyholder's reasonable expectations, etc are still desirable. Assets should still match liabilities, so investing in cash primarily because of the low return and implications on the tax position would not be such a good idea (unless of course cash is the best match). It also depends on how a company allowed for tax in it's pricing basis. If it assumes that it's Investment Income will exceed Expenses and then nets down Expenses in the pricing basis, when in fact I-E turns out to be <0 (due to for example investing in cash), then it won't get the relief on expenses as assumed in the pricing basis, which will affect profits.
