In subsection (8) (expenses attributable to basic life assurance and general annuity business for the purposes of Step 1 are to be those so attributable under proper internal accounting practice) in the second sentence (meaning of “proper internal accounting practice”) at the end of paragraph (b) insert“, or

(c)

the Integrated Prudential Sourcebook.”.

Insert the following definition at the appropriate place—

““the Integrated Prudential Sourcebook” means the Integrated Prudential Sourcebook made by the Financial Services Authority under the Financial Services and Markets Act 2000;”.

For the definition of “liabilities” substitute—

““liabilities”, in relation to an insurance company, means—

(a)

the mathematical reserves of the company as determined in accordance with chapter 7.3 of the Integrated Prudential Sourcebook, and

(b)

liabilities of the company (whose value falls to be determined in accordance with chapter 1.3 of that Sourcebook) which arise from deposit back arrangements;

and for this purpose “deposit back arrangements” has the same meaning as in that Sourcebook;”.

For the definition of “value” substitute—

““value”, in relation to an asset of an insurance company, means the value of the asset as determined in accordance with chapter 1.3, as read with chapter 3.2, of the Integrated Prudential Sourcebook;”.

In that subsection, for the definition of “RP” substitute—

“RP is the amount or the aggregate of the amounts taken into account under subsection (2) of section 83 of the Finance Act 1989 by virtue of any of the following provisions—

(a)

subsection (2B) of that section;

(b)

section 444ACA(2) of this Act.”.

At the end insert—

“(7)

Where this section applies in relation to a transfer in a case in which the transferor continues, after the transfer, to carry on insurance business which is not long-term business—

(a)

references in this section to the last period covered by a periodical return (or deemed periodical return) of the transferor shall be taken to be references to the last period covered by a periodical return (or deemed periodical return) of the transferor containing entries relating to long-term business;

(b)

subsection (4) above is to be read as if after “other than” there were inserted “ the purposes of sections 444BA to 444BD and ”.”.

After that subsection insert—

“(2A)

Subject to subsections (2C) and (2D) below, subsection (2B) below applies if—

(a)

the aggregate amount of the liabilities to policy holders and annuitants transferred to the transferee and of any relevant debts, exceeds

(b)

the element of the transferee's line 31 figure representing the transferor's long-term insurance fund.

(2B)

Where this subsection applies—

(a)

the excess is to be taken into account as a receipt of the transferee in computing in accordance with the provisions of this Act applicable to Case I of Schedule D the profits of its life assurance business for the period of account of the transferee in which the transfer takes place (“the relevant period of account”); and

(b)

the relevant proportion of the excess is to be taken into account as a receipt of the transferee in so computing the profits of each category of its life assurance business for the relevant period of account;

and, for this purpose, “the relevant proportion”, in relation to a category of the transferee's life assurance business, is the proportion that the liabilities of that category that are transferred bear to the total liabilities transferred.

(2C)

Subsection (2B) above does not require the excess to be taken into account as a receipt of the transferee in so computing the profits of its life assurance business for the relevant period of account if—

(a)

transferred liabilities of an aggregate amount equal to the excess are not taken into account in so computing those profits for that period of account, and

(b)

the amount of the closing liabilities of that period of account is taken into account as opening liabilities in so computing those profits for the next period of account.

(2D)

Subsection (2B) above does not require the relevant proportion of the excess to be taken into account as a receipt of the transferee in so computing the profits of a category of its life assurance business for the relevant period of account if—

(a)

transferred liabilities of an aggregate amount equal to the relevant proportion of the excess are not taken into account in so computing those profits for that period of account, and

(b)

the amount of the closing liabilities of that period of account is taken into account as opening liabilities in so computing those profits for the next period of account.

(2E)

In subsections (2C)(a) and (2D)(a) above “transferred liabilities” means—

(a)

liabilities to policy holders or annuitants at the end of the relevant period of account that were transferred to the transferee, and

(b)

payments made to discharge, during that period of account, liabilities to policy holders or annuitants that were transferred to the transferee.”.

After subsection (3) insert—

“(4)

In this section “relevant debts” means debts which become debts of the transferee's long-term insurance fund as a result of the transfer.

(5)

But if—

(a)

the fair value, as at the date of the transfer, of the assets which become assets of the transferee's long-term insurance fund as a result of the transfer, exceeds

(b)

the element of the transferee's line 31 figure representing the transferor's long-term insurance fund,

the amount of any relevant debts for the purposes of this section is to be reduced (but not below nil) by the excess.

(6)

In determining the amount of the liabilities transferred for the purposes of this section, there is to be disregarded any reduction in the transferee's liabilities resulting from reinsurance under a contract of reinsurance which is a relevant financial reinsurance contract (within the meaning of section 82C of the Finance Act 1989).

(7)

But where—

(a)

such a reduction results from reinsurance under a contract which was entered into by the transferor as cedant before the day on which the transfer takes place, and

(b)

the transferor's rights and obligations under the contract are transferred to the transferee under the transfer,

the amount of the reduction that would (apart from this subsection) be disregarded under subsection (6) above shall be reduced (but not below nil) by the amount given by subsection (8) below or, if less, the amount given by subsection (9) below.

(8)

The amount given by this subsection is the amount by which the liabilities at the end of the closing period which fell to be taken into account in computing in accordance with the provisions of this Act applicable to Case I of Schedule D the profits of the transferor's business for that period were reduced as a result of reinsurance under the contract.

(9)

The amount given by this subsection is the amount given by paragraph (a) below reduced (but not below nil) by the amount given by paragraph (b) below—

(a)

the amount given by this paragraph is the aggregate of the relevant amounts for any accounting period, and for this purpose the relevant amount for an accounting period is the amount in sub-paragraph (i) or (ii) below or, where applicable, the aggregate of those amounts—

(i)

the amount by which the profits of the transferor's business, computed in accordance with the provisions of this Act applicable to Case I of Schedule D, were increased for that accounting period as a result of reinsurance under the contract;

(ii)

the amount by which the losses of the transferor's business, so computed, were reduced for that accounting period as a result of reinsurance under the contract; and

(b)

the amount given by this paragraph is the aggregate of the relevant amounts for any accounting period, and for this purpose the relevant amount for an accounting period is the amount in sub-paragraph (i) or (ii) below or, where applicable, the aggregate of those amounts—

(i)

the amount by which the profits of the transferor's business, so computed, were reduced for that accounting period as a result of a reduction in reinsurance under the contract;

(ii)

the amount by which the losses of the transferor's business, so computed, were increased for that accounting period as a result of a reduction in reinsurance under the contract.

(10)

In subsections (8) and (9) above—

“the closing period” means the accounting period of the transferor ending with the day on which the transfer takes place;

“the transferor's business” means—

(a)

the transferor's life assurance business, and

(b)

any category of its life assurance business to which the liabilities relate.

(11)

For the purposes of this section and section 444ACA—

“fair value” has the meaning given by section 444AB(6);

“insurance business transfer scheme” includes a scheme which would be such a scheme but for section 105(1)(b) of the Financial Services and Markets Act 2000 (which requires the business transferred to be carried on in an EEA State).”.

After section 444AC of ICTA insert—

“444ACATransfers of business: transferor shares are assets of transferee's long-term insurance fund etc

(1)

This section applies where an insurance business transfer scheme (see section 444AC(11)) has effect to transfer long-term business from one company (“the transferor”) to another (“the transferee”).

(2)

If—

(a)

immediately before the transfer, the assets of the long-term insurance fund of the transferee comprise or include relevant shares or an interest in such shares, and

(b)

the fair value (see section 444AC(11)) of the relevant shares, or of that interest, is reduced (whether or not to nil) as a result of the transfer,

an amount equal to that reduction in fair value is to be taken into account under section 83(2) of the Finance Act 1989 as a receipt of the transferee of the period of account of the transferee in which the transfer takes place.

(3)

But if—

(a)

the assets transferred to the transferee under the transfer comprise or include assets (“the relevant assets”) which, immediately before the transfer,—

(i)

were assets of the transferor, but

(ii)

were not assets of the transferor's long-term insurance fund, and

(b)

in respect of the transfer of the relevant assets, an amount is—

(i)

brought into account by the transferee as other income of the transferee of the period of account of the transferee in which the transfer takes place, and

(ii)

taken into account in computing in accordance with the provisions of this Act applicable to Case I of Schedule D the profits of the transferee's life assurance business and any category of its life assurance business to which the amount is referable,

the amount taken into account under section 83(2) of the Finance Act 1989 by virtue of subsection (2) above shall be reduced (but not below nil) by an amount equal to the amount referred to in paragraph (b) above.

(4)

In subsection (2) above “relevant shares” means—

(a)

some or all of the shares in the transferor, or

(b)

some or all of the shares in a company (whether or not an insurance company) which owns, directly or indirectly,—

(i)

some or all of the shares in the transferor, or

(ii)

an interest in some or all of those shares.

(5)

In subsection (4) above “shares”, in relation to a company, includes any interests in the company possessed by members of the company.”.

In subsection (2A) (amounts not required to be taken into account by subsection (2)) for paragraph (a) (amounts which are entirely notional) substitute—

“(a)

comprises notional income for the period of account (see subsections (2AA) and (2AB)),

(aa)

represents an inter-fund transfer (see subsections (2AC) and (2AD)),”.

After that subsection insert—

“(2AA)

For the purposes of subsection (2A)(a) above, an amount brought into account as mentioned in paragraphs (a) to (d) of subsection (2) above for a period of account is to be regarded as notional income for the period of account if—

(a)

it represents income which has not been received, and is not receivable, from another person, and

(b)

a corresponding notional expense of the same amount is brought into account in the period of account;

and where particular income falls to be regarded as notional income under this subsection, the notional expense by virtue of which that income falls to be so regarded may not be taken into account for determining whether any other income is to be so regarded.

(2AB)

In subsection (2AA) above “notional expense” means an expense which has not been paid, and is not payable, to another person and which—

(a)

is not deductible in computing the profits of the company in respect of its life assurance business in accordance with the provisions of the Taxes Act 1988 applicable to Case I of Schedule D, but

(b)

had it represented an amount paid or payable to another person, would have been so deductible.

(2AC)

For the purposes of subsection (2A)(aa) above, where—

(a)

one or more inter-fund transfers (“transfers-in”) are made into a fund and one or more inter-fund transfers (“transfers-out”) are made out of the fund, and

(b)

the amount brought into account for the period of account as other income in respect of the transfers-in represents the amount by which—

(i)

the amount or aggregate amount of the transfers-in, exceeds

(ii)

the amount or aggregate amount of the transfers-out,

only the amount of that excess shall be taken to represent the transfers-in.

(2AD)

In this section “inter-fund transfer” means a transfer between two funds which in the company's periodical return is shown in, or included in amounts shown in, line 14 or 33 of the Forms 58 for the funds.”.

After subsection (3) insert—

“(3A)

Where, in the case of any with-profits fund in respect of which there is prepared such a separate account (“the sub-fund”),—

(a)

the sub-fund forms part of another with-profits fund (“the wider fund”) in respect of which such a separate account is also prepared,

(b)

in the case of a company whose life assurance business is mutual business, the sub-fund and each other with-profits fund which forms part of the wider fund are 100:0 funds, and

(c)

the wider fund—

(i)

does not form part of another with-profits fund in respect of which such a separate account is also prepared, or

(ii)

forms part of another with-profits fund in respect of which such a separate account is also prepared and that separate account is treated by this subsection as not being a recognised account for the purposes of those sections,

the account in respect of the wider fund shall not be a recognised account for the purposes of those sections.

(3B)

Where, in the case of such a separate account prepared in respect of a with-profits fund,—

(a)

the account is not prevented from being a recognised account for the purposes of those sections by virtue of subsection (3A) above, but

(b)

if paragraph (b) of that subsection were to be omitted, the account would be prevented from being such a recognised account by virtue of that subsection,

no such separate account prepared in respect of a with-profits fund forming part of that fund shall be such a recognised account.

(3C)

In subsection (3A) above “100:0 fund” means a fund in the case of which—

(a)

the policy holders of the fund are entitled to participate in all the profits of the fund, and

(b)

no other persons are entitled to participate in any of the profits of the fund.

(3D)

Subsection (3E) below applies where there is prepared such a separate account (“the with-profits account”) in respect of a with-profits fund—

(a)

of which no other with-profits fund forms part, but

(b)

of which a non-profit fund (see subsection (6)) forms part.

(3E)

Where this subsection applies—

(a)

the with-profits account shall not be a recognised account for the purposes of those sections, but

(b)

there shall be treated as having been required and prepared a further separate revenue account covering so much of the items brought into account in the with-profits account as remains after excluding the items brought into account in that account in respect of the non-profit fund.”.

For subsection (4) substitute—

“(4)

If—

(a)

a company prepares a revenue account in respect of the whole of its long-term business (“the main account”),

(b)

it prepares one or more such separate accounts as are mentioned in subsection (2)(b) above, and

(c)

the total of the items brought into account in the separate accounts—

(i)

excluding any such accounts which by virtue of subsection (3A), (3B) or (3E)(a) above are not recognised accounts for the purposes of those sections, but

(ii)

including any such accounts which by virtue of subsection (3E)(b) above are treated as having been required and prepared,

is not equal to the total amount brought into account in the main account,

there shall be treated as having been required and prepared a further separate revenue account covering the balance.”.

At the end of the section insert—

“(6)

In this section “with-profits fund” and “non-profit fund” have the same meaning as in the Integrated Prudential Sourcebook.”.

After section 83A of FA 1989 insert—

“83BChanges in recognised accounts: attribution of amounts carried forward under s.432F of Taxes Act 1988

(1)

This section applies to a company where any revenue account that is recognised for a period of account (the “new period of account”) relates to funds or business which is different from the funds or business to which a revenue account that was recognised for the preceding period of account relates.

(2)

Any subsection (2) excess (within the meaning of section 432F(2) of the Taxes Act 1988) which would have been available under section 432F(3) or (4) of that Act to reduce a subsection (3) figure (within the meaning of section 432F(1) of that Act) of the company in the new period of account shall be attributed between the revenue accounts that are recognised for that period of account in such manner as is appropriate.

(3)

In this section “recognised” means recognised, by virtue of section 83A, for the purposes of sections 82A to 83AB.”.

In subsection (2) (receipts excluded from charge under Case VI of Schedule D in respect of receipts referable to company's basic life assurance and general annuity business) after paragraph (e) insert“; or

(f)

any payment received under the Financial Services Compensation Scheme to enable the company to meet its obligations to policy holders.”.

In subsection (2C) (rules as to whether receipt is referable to company's basic life assurance and general annuity business for the purposes of subsection (1)) after paragraph (a) insert—

“(aa)

in the case of a repayment or refund of expenses other than acquisition expenses, the expenses—

(i)

were attributable to basic life assurance and general annuity business for the purposes of Step 1 in subsection (7) of the new section 76 (see subsection (8) of that section), or

(ii)

fell to be deducted by virtue of subsection (1) of the old section 76;

and for this purpose, “the new section 76” and “the old section 76” have the same meaning as in section 44 of the Finance Act 2004 (see subsection (8) of that section),”.

In subsection (3A) (meaning of “income and gains of the company's life assurance business” in subsection (3)) after paragraph (a) insert—

“(aa)

receipts of the company chargeable under Case VI of Schedule D by virtue of section 85(1) above,

(ab)

income of the company treated as referable to basic life assurance and general annuity business by section 441B(2) of the Taxes Act 1988 (treatment of UK land),

(ac)

amounts treated as accruing to the company and charged to tax under Case VI of Schedule D by virtue of section 442A of that Act (taxation of investment return where risk reinsured), and”.

For subsection (4) (regulations amending certain provisions relating to overseas life insurance companies may be made with effect from 1st January 2003) substitute—

“(4)

Regulations under this section may be made so as to have effect in relation to accounting periods or periods of account (whenever beginning) which end on or after the day on which the regulations come into force.”.

In that section, insert at the end—

“(3)

Where—

(a)

immediately before 6th April 2006 an annuity contract falls within any of the descriptions of contracts specified in subsection (2) of this section as it had effect immediately before that date, but

(b)

on or after that date the contract does not fall to be regarded for the purposes of this section as having been entered into for the purposes of a registered pension scheme,

the contract is to be treated for the purposes of this section as having been entered into for such purposes.”.

After subsection (7B) insert—

“(7C)

Where subsection (1) of section 444AA applies in the case of an insurance business transfer scheme—

(a)

an accounting period of the transferor shall end for purposes of corporation tax—

(i)

with the end of the period covered by the periodical return deemed by virtue of subsection (2) of that section, or

(ii)

where the last period covered by an actual periodical return of the transferor ends immediately before the transfer, with the end of that period,

(so that an accounting period will end immediately before the transfer), and

(b)

an accounting period of the transferor shall end for purposes of corporation tax with the end of the period covered by the periodical return deemed by virtue of subsection (3) of that section (so that the time of the transfer shall be an accounting period of the transferor);

and for this purpose, expressions used in this subsection and in that section have the same meaning in this subsection as in that section.”.

In section 213 of TCGA 1992 (spreading of gains and losses under section 212 of TCGA 1992) at the end insert—

“(10)

If the transfer is one to which section 444AA(1) of the Taxes Act applies, the references in this section to the accounting period of the transferor ending with the day of the transfer are references to the accounting period ending immediately before the transfer.”.