IR38                               29 November 1994

    TAXATION OF LIFE ASSURANCE COMPANIES : REINSURANCE

The Chancellor proposes in his Budget to:

         include  the  profit  from certain  reinsurance
         contracts  in  the  income  that  is   normally
         charged  to  tax  in  the  hands  of   a   life
         insurance company;

         change  the tax treatment of companies carrying
         on reinsurance business;

The  Chancellor's  intention is to  prevent  reinsurance arrangements
being used to avoid the tax chargeable  on companies  on behalf of
policyholders, and  to  put  the taxation treatment of reassurance
business onto  a  more appropriate basis.

These  measures come into effect for accounting  periods
beginning after 31 December 1994.

                          DETAILS

1.    Reinsurance  involves  one  insurer  insuring  its
liabilities to pay its policyholders with another, often
one   that   only   carries  on  reinsurance   business.
Reinsurance has always been widely used by life  offices
for a variety of purposes, such as to reduce a company's
exposure  to  particular large or unusual  death  risks.
However,  there has recently been a substantial increase
in a particular type of reinsurance, where the reinsurer
takes  on the investment content of some types of policy
which have little death risk.

2.   Where this happens the investment return earned for the  policy
holder can effectively be free of  any  tax.  The   tax  system  for
life  assurance  works  on   the assumption  that tax is paid at the
basic  rate  on  the investment return received by the life insurance
company on behalf of the policy  holder, and as a result
policyholders  are  not charged to tax at the basic rate when they
make  a  gain on  a  policy.  Under  the Chancellor's  proposals,
the investment   return  on  certain  types  of  reinsurance contract
which  currently  escapes  taxation  will   be charged  to tax as
income in each year during which  the contract is in force.

3.    Regulations  will set out how  the  rate  of  this return   is
to  be  calculated  and  which   types   of reinsurance  will  be
affected. The proposals  will  not affect  the traditional
reinsurance of death risk  alone or  of  most term assurance, and
will not apply  to  the reinsurance   of  pension  business  or
overseas   life assurance  business.  They  will  not  apply  where
the reinsurer  is  itself liable to tax  on  the  investment return,
nor to certain group arrangements. The detail of the regulations will
be the subject of consultation with the industry.

4.    To fit in with this scheme, and to make sure  they are  taxed
in a more appropriate way, pure  reinsurers, that  is companies that
write only reinsurance business, will  in  future  be  charged to tax
on  their  profits calculated  in accordance with the rules of  Case
I  of Schedule  D  which  apply generally to  the  profits  of
ordinary trading companies. And where a company which is not  a  pure
reinsurer writes some reinsurance business, that  business  will be
treated as a  separate  business from  the  company's other life
assurance business.  The business to be treated in this way will
include  certain business  that is currently classified as overseas
life assurance business.

                     NOTES FOR EDITORS

1.    Details of the major changes to the tax rules  for life
assurance announced in 1989, 1990  and  1991  were included  in
Inland Revenue Press Releases of  14  March 1989  ("New  Rules  for
Taxing  Life  Assurance"),   20 December 1989 ("Life Assurance:
Further Details  of  the Tax  Rules  from  1990 Onwards"), 20 March
1990  ("Life Assurance  Tax  Proposals") and  19  March  1991  ("Life
Assurance Tax Proposals").

2.    These changes come as a result of a review of  the earlier
reforms  which  the Inland  Revenue  have  been conducting,  with
assistance  from  the  representative bodies of the industry.