Where a company has surplus funds and chooses to invest them in an investment bond (onshore or offshore), the bond is taxed under the ‘loan relationship’ rules (as are many other corporate investments). The main accounting methods currently used in relation to company-owned investment bonds are historic cost and fair value. Changes from 1st January 2016 mean that all company-owned bonds, whether new or existing (except those started before 14th March 1989) will be taxed on the fair value basis (except those owned by ‘micro’ entities). We take a closer look at these changes in this article.
Historic cost
Currently, only companies that are eligible for and have adopted the Financial Reporting Standard for Smaller Entities (FRSSE) can use the historic cost basis. To be eligible for the FRSSE the company must meet two of the following criteria:
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Turnover of £6.5m or less
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Balance sheet assets of up to £3.26m
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Average number of employees no more than 50
With this method the bond is simply shown in the Balance Sheet at the end of each accounting period at the original investment amount regardless of the actual surrender value. No annual gain (or loss) is shown in the company accounts therefore there are no corporation tax consequences. The company can defer any assessment for corporation tax until there is a disposal, i.e. full or partial surrender or death of the last life assured. The 5% allowance facility isn’t available to companies.
Fair value
With this method, the Balance Sheet at the end of each accounting period will include the bond based on its surrender value at that date so that the annual change in value (either a gain or loss) is processed through the profit and loss account and is taken into account for corporation tax purposes. Even if no disposals are made the company doesn’t achieve tax deferral as any increase in value will be subject to corporation tax each year (any loss can be offset).
Changes from 1st April 2016
Small companies will use Financial Reporting Standard 102 (FRS102) for accounting periods commencing on or after 1st January 2016, as well as the majority of large and medium-sized UK entities. This means that investment bonds will need to be accounted for under the fair value regime. Only very small companies called ‘Micro’ entities e.g. contractor type companies, will be able to continue with historic cost accounting for investment bonds, i.e. companies that qualify for the micro entity regime and who choose that regime because it’s appropriate for their business.
A company meets the qualifying conditions for a micro-entity if it meets at least two out of three of the following thresholds:
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Turnover of £632,000 or less
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Balance sheet assets of up to £316,000
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Average number of employees no more than 10
