For a variety of reasons, it is common for a company to hold cash on the balance sheet surplus to working capital requirements. The company will receive gross interest from the bank and pay corporation tax annually on the interest earned.
With interest rates at historically low levels, companies are increasingly seeking a better return for that cash. Low volatility is generally important as those funds will be required for business purposes at some point.
Bonds are taxed under the 'loan relationship' rules, the remit of which extends well beyond insurance bonds.
Although complex in nature, in very broad terms, these rules require the taxation treatment of the item in question (in this case an insurance bond) to follow the accounting treatment. To understand the tax treatment of a corporate owned insurance bond, it is therefore necessary to consider the accounting treatment. There are a number of accounting standards that a company might use – principally historic cost and fair value.
The bond is simply shown in the balance sheet at the end of the company's accounting period at the original premium amount, regardless of the actual surrender value. No annual gain (or loss) is recognised in the company accounts, meaning no corporation tax consequences arise. The company achieves tax deferral until there is a disposal event such as full surrender, partial surrender or death of last life assured.
In this case, the balance sheet at the end of the accounting period will include the bond at its surrender value at that date. That means the movement in value (either a gain or loss) has been processed through the profit and loss account. That movement has corporation tax consequences. The company does not achieve tax deferral since the increase in value will be subject to corporation tax (any decrease is potentially relievable for corporation tax purposes).
MN Consultancy has been advising corporate clients on how best to put their surplus cash to work. We have been using both onshore and offshore investment bonds as a means of achieving a greater return on their money.