Clause 64.—(INSURANCE COMPANIES.) (Hansard, 12 July 1965)

§ Mr. Diamond
I beg to move Amendment No. 285, Clause 64, in page 132, line 26, to leave out "but where this provision operates" and insert: and where in any accounting period this subsection applies to prevent or restrict the deduction of expenses of management in computing profits chargable to corporation tax, then—

(a) if the amount on which the company would be so charged under Case I of Schedule D exceeds those profits (before any such deduction) an amount equal to that excess shall be deducted from the amount of franked investment income that may be treated as profits of the period chargeable to corporation tax for purposes of a claim under section 58 of this Act; and

(b) subject to any claim under section 58 for that accounting period,".

I hope that it will be convenient to discuss, at the same time, Amendment No. 286, in Clause 64, in page 132, line 29, leave out lines 29 to 33.

Mr. Deputy-Speaker
Yes.

§ Mr. Diamond
These Amendments make clear how the limitation on deduction for management expenses allowable to a company carrying on the business of life assurance will work under Corporation Tax. They are an improvement which I believe will be welcomed by the companies themselves.
128 The Amendments first make it clear that the expenses of management of a life assurance company may be set against franked investment income. This was the subject of Amendment No. 657 moved by the hon. Member for Worcester (Mr. Peter Walker) in Committee, which was withdrawn when I gave the assurance reported in col. 747 of HANSARD for 16th June.
The Amendment also deals with a somewhat technical point which arises out of the special rules found in the existing law for the taxation of life assurance companies under which the relief for the expenses of management is, if necessary, limited by reference to what is generally called the notional Case I liability, which is a phrase well understood in this context.
The Amendments secure that the only circumstances in which there will be a restriction of management expenses are when the franked investment income and other income together are not enough to allow them all without the resulting figure being less than the notional Case I liability.

§ Mr. Diamond
I beg to move Amendment No. 196, Clause 64, in page 133, line 31, at the end, to insert: (d) where section 429 of the Income Tax Act 1952 has effect in relation to income arising from investments of any part of a company's life assurance fund, it shall have the like effect in relation to chargeable gains accruing from the disposal of any such investments, and losses so accruing shall not be allowable losses. This Amendment implements an assurance which I gave in Committee when the hon. Member for Worcester (Mr. Peter Walker) moved an Amendment designed to ensure that United Kingdom life assurance companies were taxed on capital gains arising on investments held for the purpose of a foreign life fund only to the same extent as they are taxed on the income arising from those investments, namely, to the extent that the gains or income are remitted to the United Kingdom.
The Amendment meets that point completely.

§ Mr. Diamond
I beg to move Amendment No. 198, Clause 64, in page 134, line 43, at the end, to insert: (7A) Where—

(a) a company carrying on life assurance business has before the date of the passing of this Act issued policies of life assurance—

(i) providing for benefits which consist to any extent of investments of a specified description or of a sum of money to be determined by reference to the value of such investments; but

(ii) not providing for the deduction from those benefits of any amount by reference to tax chargeable in respect of chargeable gains; and

(b) the investments of the company's life assurance fund, so far as referable to those policies, consist wholly or mainly of investments of the description so specified; and

(c) on the company becoming liable under any of those policies for any such benefits (including benefits to be provided on the surrender of a policy), a chargeable gain accrues to the company from the disposal in meeting or for the purpose of meeting that liability of investments of that description forming part of its life assurance fund, or would so accrue if the liability were met by or from the proceeds of such a disposal;

then the company shall be entitled as against the person receiving the benefits to retain out of them a part of them not exceeding in amount or value corporation tax in respect of the gain referred to at (c) above, computed without regard to any amount retained under this provision, and computed at the rate of corporation tax for the time being in force or, if no rate has yet been fixed for the financial year, at the rate last in force or, if no rate has yet been fixed for any financial year, at a rate of thirty-five per cent.: Provided that in so far as the chargeable gain represents or would represent a gain belonging or allocated to, or reserved for, policy holders the amount that is to be retained shall be computed by reference to a rate of tax not exceeding thirty-seven and a half per cent. This Amendment meets representations which have been made about the effect of the Capital Gains Tax on certain life assurance companies which issue endowment policies linked with unit trust schemes. As these insurance contracts stand, the insurance company is required on maturity or surrender of the policy to hand over to the beneficiary a gross amount of units or an equivalent gross amount of cash. By "gross" I mean before deducting Capital Gains Tax.
The introduction of a tax on the capital gains of a life assurance company affects the arrangements of this kind. It is clear that the problem relates only to contracts entered into before the tax on 130 capital gains was introduced, because new policies, in general, are now being issued on a net basis, that is to say, on a basis which entitles the insurer to deduct from the proceeds any Capital Gains Tax liability incurred.
The purpose of the Amendment, therefore, is to provide the companies concerned with a right of recoupment against the beneficiary under policies which provide for the benefits without any deduction of tax. It would be proper for me to add that the terms of the Amendment have been cleared with and agreed by the representatives of the assurance companies concerned.