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This section sets out the taxation consequences arising from the removal of the regulatory requirement for general insurers to maintain equalisation reserves.

Built-up reserves held at 31 December 2015 are to be released in equal instalments over a transitional 6 year period, subject to an election to accelerate receipts under FA12/S26(4) � see GIM7440.

One-sixth of an insurance company’s existing equalisation or equivalent reserve will be taxed as a receipt of the company’s business in each of the six calendar years beginning with the calendar year 2016. See FA12/S26(4).

If the company has more than one accounting period in any of the transition years, FA12/S26(5) specifies that the amount to be taxed is apportioned between the accounting periods in proportion to the number of calendar days falling in each.

Example

»Ê¹ÚÌåÓýapp example is based on the following scenario:

• Company A draws up its accounts to 31 March
• As at 31 December 2015 it had equalisation reserves of £6m.
• No elections are made.

Under the FA12 rules Company A will be taxed on its reserves of £6m equally over a period of 6 calendar years, meaning £1m per calendar year.

For the accounting period ended 31 March 2016 an amount of £250,000 (£1m x 3/12) will be taxed representing the 3 month period to 31 March 2016.

For the accounting period ended 31 March 2017 an amount of £1m will be taxable. This represents;

£750,000 for the period 01 April 2016 � 31 December 2016 and

£250,000 for the period 01 January 2017 � 31 March 2017.

Insurance companies can elect to accelerate the receipts, see GIM7440.