Accurate investment accounting is fundamental to tax provisioning in unit pricing. The ability of systems to achieve granularity in the classification of assets, distributions and tax credits for tax purposes is essential. For example, identifying that an OEIC should be classified as a bond fund and taxed as a loan relationship may be important for unit pricing, particularly when the unit-linked fund has capital losses.
Over recent years there have been a number of changes to the detailed rules on the taxation of investment assets relevant to insurers. These include:
- Refinements to corporate streaming rules and the related deemed tax credit
- Modification of the treatment of non-UK contractual funds
- New CFC rules (with modifications for LTIF investments)
- Refinements to the definition and taxation of offshore funds
- Change to the taxation of any dividend distribution received from bond funds
- Creation of new types of UK fund such as PAIFs and TEFs
Some of these changes are small but cumulatively they present a challenge. If the tax function is too remote it is easy for misclassifications or other errors to occur.
Where linked funds are invested directly in overseas assets, insurers should establish how accurately and comprehensively withholding taxes are being mitigated. For example, unit-linked pension business can benefit from a 0% rate of withholding under the UK/US treaty. There should be some governance where amounts of withholding tax in excess of treaty rates are written off (Taiwan is a common example).
For a number of reasons, BLAGAB is in decline for many insurers. Where funds are rationalised, one issue to determine is the fair treatment for any carried forward losses.
If there are material tax assets and liabilities on the fund’s balance sheet then a rapid rate of decline in the fund may distort fund performance through a gearing effect.
In some cases transferring a portfolio to a collective investment scheme may be an option. The tax analysis will depend on the type of vehicle selected. At the point of transfer, it will be necessary to consider whether gains and losses crystallise, efficient use of indexation allowances and stamp duties. Thereafter, the amount of withholding tax suffered may differ. The coming months should see the launch of rules for UK authorised tax transparent funds. Some insurance group are actively examining their asset pooling strategies in light of the opportunities these rules give.
In other cases, a programme of disposals may be part of the strategy. If this includes real estate assets, the changes in FA 2012 mean that it may be advantageous to make capital allowances claims for the first time so as the enhance the value to a potential purchaser. This can be true even if the asset is in a pension linked fund (and so the insurance company unable to benefit from capital allowances itself).
If you would like to discuss matters raised in this article please contact Laura Kochanski, Gordon Gray, or your usual KPMG tax or actuarial contact.