There are two principal accounting practices, fair value and historic cost.

Fair value

Under this method, any increase in the investment over the accounting period will be taxed as a non-trading credit and corporation tax will be due if there is a gain over the period.

Historic cost

Under this method, there is no increase year on year within the accounts. Corporation tax is only levied when part or all of the investment is realised. For historic cost basis to apply, a company would need to satisfy various rules under the Financial Reporting Standards for Smaller Entities (FRSSE) (see ‘Taxation of company-owned life assurance policies' for further details).

Where a UK company owns a collective, UK life assurance, offshore life assurance or a redemption policy, corporation tax will broadly apply as follows:

Fair value accounting basis

Where the historic cost basis applies, investments will generally only be taxed on realisation of part or all of the investment (ie withdrawal, encashment, disposal). The investment criteria outlined for collectives above would also not apply.

Establishing the accounting basis of the company is the major influencing factor when looking at corporate investments. Understanding how and when corporation tax may become payable will also help shape the asset mix within the investment portfolio and exit strategies for the company. However, since the extension to the Loan relationship rules was introduced the opportunity for ‘gross roll-up and tax deferment’ for company investments has significantly reduced.

* There would be no further corporation tax liability on that part of a UK dividend treated as franked investment. Any distributions received that are treated as unfranked investment income (including parts of dividend payments and reinvested income under accumulation units) could be liable to additional corporation tax on an arising basis.
** Death benefits and payments in relation to critical illness are not included. However, for valuation purposes, a life policy may have a significant increase in value where the life assured is in poor health, but no claim is made. Term assurance contracts are outside the scope of the loan relationship rules.