Thank you for the reply. I understand why TA will be adversely impacted by XSE. There is also the UL pension savings product involved in the question though (April 2010)? I assume the investment income is small on this product because it is not a single premium savings product (like in September 2021) => hence, as the mark scheme for April 2010 says, "The change from XSI to XSE has no material impact on Gross Roll-Up Business". The investment income from the single premium savings product (in September 2021) would be more material so XSE can help with lower premiums/charges (like you said in your other comment). Is this correct?
The UL pension product would have material investment earnings, but remember that pensions products are part of the non-BLAGAB tax fund. XSI / XSE refers only to BLAGAB business. Hence what goes on in the BLAGAB fund has no relevance to the pension business - it is taxed separately (on profits, not I minus E).
Thank you, Lindsay. A correction for #4 for future reference- Carried forward and so made available to offset against any profit arising in future years.
Hi, the course reading in chapter 8 mentions: " tax will be charged on each BLAGAB unit linked fund".. "For WP business it is necessary to determine how to allocate the tax credits & charges to each WP fund" May I understand how are these charges defined/calculated?
Please ignore this question. I've found the answer to this myself. However, I do have a question - why does asset share calculations deduct tax? Isn't tax that company pays already included in premium pricing?
Asset share = representation of the accumulation of actual assets held by the company relating to that policy. If tax has been paid on the investment earnings underlying that policy, for example, then that should be deducted from asset share (as money has been paid out to meet that tax bill). If tax has not yet been paid on the investment earnings (eg because the gains are unrealised, and only realised gains are taxable) then a tax liability deduction will be made from asset share, to ensure that those who have gained from that investment return are contributing towards the tax incurred on it.
Hi, may I please understand: 1. Why without profits business may be written in WP fund? 2. and what is the risk of having without profits business in closed WP fund?
Hi - if you are starting a new topic, as is the case here, please could you start a new thread with an appropriate title so that other students can find topics of interest more easily? (This thread is 'Taxation') To answer quickly: See https://www.acted.co.uk/forums/index.php?threads/np-business-within-the-wpf.18825/ This is explained in the course notes, chapter 'Management of with-profits business' section 1.3.
Hi Lindsay, sorry I’m being slow and struggling to understand what we mean by “tax relief” here. Please could you help me with the use of some numbers (ignoring the min profits test). If I=6 and E=10 (ie XSE) then we carry forward the E and aren’t taxed anything, which is good for pricing, so is that what we mean by “achieve full tax relief on E”? Conversely if I=10 and E=6 (ie XSI) then I-E=4 all gets taxed at policyholder tax, which is less preferable than paying tax I assume and so we have higher premiums, so we “don’t achieve tax relief on E” here?
Gaining 'tax relief' means not being taxed. If I=6 and E=10 then we are only able to use E=6 to gain tax relief. Ignoring the minimum profits test, the company pays no tax - but we have E=4 of unrelieved expenses, so we have NOT achieved full tax relief from the E. Effectively, we have incurred 6 of E net of tax but 4 of E gross of tax. (That's assuming that the company stays in an XSE position and so is not able to gain tax relief from using the XSE=4 in future years.) If I=12 and E=10 then all of the E=10 is used to reduce the company's tax bill, so has allowed the company to gain full tax relief from the E. Effectively, the full E=10 has been incurred net of tax. For term assurance business, which has much higher E than I, not gaining full tax relief on E means higher premiums, due to having to cover (higher) gross expenses rather than net expenses in the pricing calculation. (Because I is very low for such business, whether I is gross or net has a significantly less material impact on pricing.)
