Lloyd's Of London Welcomes New Tax Measure

by Robert Lee, Tax-News.com, London

09 December 2008

Lloyd's of London, the global insurance market, has welcomed a recently-announced tax measure by the government of the United Kingdom, which aligns the tax treatment of Lloyd’s corporate members’ reserves with that of other general insurers.

Commenting on the announcement, which was part of the recent pre-budget report, Lloyd's Chairman Lord Levene said: "We welcome this decision that finally brings the tax treatment of Lloyd's reserves into line with other UK insurers and will contribute to Lloyd's ability to compete globally. We are grateful to the Treasury and HMRC for their support in introducing this change."

Since 1996, general insurers have had to put up Claims Equalisation Reserves (CERs) for solvency purposes, requiring them to set aside premiums on certain types of volatile classes of business in profitable years to provide a cushion against periods with worse than average claims.

Tax relief is available for amounts transferred into the CER with the effect that some volatility of the tax result is removed. Lloyd’s is not required to set up CERs for solvency purposes, as when they were introduced for general insurers in 1996 Lloyd’s was deemed to be adequately capitalised. As a result, Lloyd’s has not historically been able to take advantage of this tax relief.

The new legislation means that Lloyd’s Corporate Members will in future benefit from a tax relief for CERs. Unlike general insurers, however, Lloyd's will not be required to create a CER for solvency purposes, recognising that the Lloyd's capital regime ensures members are already adequately capitalised.

The legislation will apply to profits treated as arising in the year ended December 31, 2008 and is intended to mirror the tax regime as it applies to general insurers with adaptations to take account of Lloyd’s unique structure.

Lloyds said that there is little detail available at present as to how the CERs for Lloyd’s Corporate Members will operate, although it intends to explore this further with the Treasury over the coming months. In particular, it is presently unclear whether partners of Limited Liability Partnerships (LLPs) and Scottish Limited Partnerships (SLPs) will be able to establish a claims equalisation reserve for tax purposes. The relief will not apply to individual members who already benefit from the Special Reserve Fund, which has a similar effect.

On the issue of 'Solvency II,' a proposed new capital regime for insurers in the European Union, Lloyd's said that general insurers will no longer be required to put up CERs for solvency purposes. However, Lloyd’s has been lobbying for the extension of tax relief on CERs beyond the introduction of Solvency II, and the government has announced that it will review the case for such an extension.

Lloyd’s said that it will continue to work with the Treasury and HM Revenue and Customs on tax issues.

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