New tax rules to stem flood of (re)insurers and brokers leaving UK

16 February 2012

The UK tax authorities, HMRC, last month issued its latest plans to reform the corporation tax rules on international re/insurers and brokers.  Its aim is to stem the redomiciliation of insurers (e.g. Brit Insurance moving to the Netherlands), and attract more foreign players to relocate their headquarters to the UK (e.g Aon to London).

The new legislation centres on the ‘controlled foreign company’ (CFC) rules.  These provide guidance on what income earned abroad of a UK-based insurer/broker is liable to UK corporation tax.

Under the existing rules, UK-based insurers/brokers often suffer UK corporation tax on income earned abroad.  This can mean paying UK tax at 26% compared to, for example, Irish or Swiss tax which are 12.5% as 11% respectively.  This difference is what has led to many insurers and brokers redomiciling their headquarters abroad to low-tax jurisdictions.

The Association of British Insurers, ABI, has been lobbying hard to get the proposed CFC legislation to reflect the particular needs of the insurance industry, and stop the outflow of companies.  There are a number of changes in the legislation to the rules to exclude foreign income that will be attractive to insurers and brokers.  These include:

  • Income earned on foreign property – which insurers invest substantial sums in to back their insurance risk portfolios. 
  • Insurers or brokers based in the UK, but earning most of their income from foreign business, will be largely exempt from UK tax.
  • Reinsurance of a UK company if the location of the risk is outside of Europe will be exempt from UK tax

The rules for determining if insurance risk income is liable to UK tax based on headcount associated with the risk are to be relaxed.  This change is the result of much pressure from the ABI, which was concerned that this did not reflect the way UK insurance works.

The new proposed legislation is good news for the UK insurance industry.  For over 10 years, the industry has been penalised for being located in this country, and has been voting with its feet to move overseas.  With these new rules, the UK will become one of the most competitive locations to be domiciled for insurers.  Combined with the huge expertise and infrastructure in the London market, this once more makes the UK the place to be for global (re)insurers and brokers - as witnessed by Aon’s decision in January to relocates its global headquarters from the US to London.

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