Calculating Corporation Tax on surrender of a bond

[CALTD]

I should be grateful if someone could confirm the mechanics of working out the Corp Tax due.

Original Premium paid £200000 (2001)
Surrender Value £280000 (2007)

Is the gain purely £80000 subject to CT or can you claim indexation. Also the surrender statement shows number of years since insurance made.? Is this relevant?

Thank you very much to anyone for any help.

[clinterus]

What sort of bond please?

[bob.fraser@towrylaw.]

You should provide a little more information about the bond.
Was it an onshore or offshore bond? I would expect it to be an offshore bond, but cannot assume it to be so. Both bonds are taxed the same for companies, although the internal (non-recoverable) taxation of onshores bonds makes them generally unsuitable for corporate investments.
Was the investment bond on a life assurance basis, or on a capital redemption basis? The government changed the taxation of capital redemption bonds in 2005.
Assuming that the bond is indeed an investment bond, then indexation is not relevant.
However, the gains on the policy can be offset against any losses incurred by the company.
Is there any particular reason why your financial advisor is unable to answer your very basic question?

Bob Fraser
Chartered Financial Advisor

[CALTD]

Thank you for your help.

The bond is offshore and a capital redemption bond

[bob.fraser@towrylaw.]

Your advisor should have pointed out the following:

A Capital Redemption Bond (CRB) is simply fixed term policy where the policyholder pays a lump sum to the insurance company in return for the insurance company guaranteeing to pay back a larger fixed lump sum at the end of the term. The relationship between the policyholder and the insurance company was that of a loan.

In some cases CRBs have been used by specialist tax planners to create artificial capital losses for companies. The artificial loss arose from the fact that a CRB can be manipulated so that it is subject to both the CGT regime and the policyholder tax regime. Surrender of a CRB could therefore be both a disposal under CGT rules and a chargeable event under policyholder tax rules.

On 10th February 2005 the Government blocked such planning. The announcement said that "These changes will protect revenue for investment in public services and ensure that an unfair burden does not fall on the vast majority of taxpayers who pay their fair share." This statement was followed by Revenue Bulletin 22 which said: "The following schemes are blocked...(e) Generation of artificial capital losses by companies using capital redemption bonds..." and "the changes apply to...(e) from 10 February 2005." The way the CRB scheme has been blocked is by moving a company-owned CRB into a tax regime that has been around since 1996 and is known as the loan relationships regime. The blocking legislation is set out in the Finance (No.2) Act 2005, Schedule 7, paragraph 14. The rules there apply from 10 February 2005.

This means that a company can no longer enjoy the tax-deferral advantage. The 2005 changes apply not only to new CRBs but also to any CRB that a company already owned on 10 February 2005.
In your case the change means that HMRC will deem that the CRB was assigned for money or money's worth on 10th February 2005. Any deemed chargeable event gain figure on that date will be carried forward until the CRB leaves the loan relationships regime, which will be when the company surrenders its CRB or assigns it so that it no longer belongs to the company. At that point the deemed chargeable event gain from 10 February 2005 will be brought into account for corporation tax.

From 10 February onwards each year's increase or decrease in the value of a company-owned CRB will be treated as a profit or loss under the loan relationship rules.

Bob Fraser
Chartered Financial Planner

[CALTD]

OK thank you Bob for your help and point noted.

I assume a life assurance bond is then just taxed on the gain arising in the year of surrender then?

[bob.fraser@towrylaw.]

Broadly, yes.
But the government, bless them, have just announced that they are extending the loan relationship to include life assurance policies owned by companies.
This means that unit trusts are now a more favourable investment than offshore bonds.

Bob Fraser
Chartered Financial Planner