Income Tax (Trading and Other Income) Bill

House of Commons

Session 2004 - 05
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Other Bills before Parliament

Income Tax (Trading and Other Income) Bill

Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 5 — Stock dividends from UK resident companies
176

407
Dividend payment when dividend shares cease to be subject to SIP
(1)
This section applies if dividend shares cease to be subject to an approved share
incentive plan before the end of the period of 3 years beginning with the date
on which the shares were acquired on the participant’s behalf.
(2)
For income tax purposes a dividend is treated as paid to the participant in the
5
tax year in which the shares cease to be subject to the plan.
(3)
The amount of the dividend treated as paid is the amount of the cash dividend
applied to acquire the shares on the participant’s behalf, so far as it represents
a cash dividend paid in respect of plan shares in a non-UK resident company.
(4)
The person liable for any tax charged as a result of this section is the
10
participant.
(5)
For rules identifying shares ceasing to be subject to approved share incentive
plans, see section 508 of ITEPA 2003.
408
Reduction in tax due in cases within section 407
(1)
This section applies if—
15
(a)
a person is liable for tax as a result of section 407, and
(b)
any tax is paid on any capital receipts under section 501 of ITEPA 2003
(charge on capital receipts in respect of plan shares) in respect of the
shares that cease to be subject to the approved share incentive plan.
(2)
The tax due as a result of section 407 is to be reduced by an amount equal to the
20
total tax so paid.
(3)
For rules identifying shares ceasing to be subject to approved share incentive
plans, see section 508 of ITEPA 2003.
Chapter 5
Stock dividends from UK resident companies
25
409
Charge to tax on stock dividend income
(1)
Income tax is charged on stock dividend income.
(2)
In this Chapter “stock dividend income” means the income that is treated as
arising under section 410.
410
When stock dividend income arises
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(1)
This section applies if share capital is issued as mentioned in section 249(1)(a)
or (b) of ICTA (certain share capital issued by UK resident companies in lieu of
dividends or as bonus share capital).
(2)
If an individual is beneficially entitled to that share capital, income is treated
as arising to the individual.
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(3)
If—
(a)
the share capital is issued to trustees in respect of shares they hold in
the company (alone or with others), and

Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 5 — Stock dividends from UK resident companies
177

(b)
a cash dividend paid to them in respect of the shares would have been
to any extent income to which section 686 of ICTA applies
(accumulation and discretionary trusts: special rates of tax),

income is treated as arising to the trustees.
(4)
If the share capital is issued to personal representatives during the
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administration period, income is treated as arising (but see section 413(4)).
(5)
In subsection (4) “administration period” has the meaning given by section 653.
(6)
Income within this section is treated as arising on the earliest date on which the
company is required to issue the share capital in question.
(7)
See section 413(5) (apportionment) if two or more persons are entitled to the
10
share capital.
411
Income charged
(1)
Tax is charged under this Chapter on the amount of stock dividend income
treated for income tax purposes as arising in the tax year.
(2)
That amount is the cash equivalent of the share capital on the issue of which
15
the stock dividend income arises (see section 412), grossed up by reference to
the dividend ordinary rate for the tax year.
412
Cash equivalent of share capital
(1)
The cash equivalent of share capital within section 249(1)(a) of ICTA (an issue
in lieu of cash dividend) is the amount of the cash dividend alternative.
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(2)
But if the difference between the cash dividend alternative and the share capital’s
market value equals or exceeds 15% of that market value—
(a)
subsection (1) does not apply, and
(b)
the cash equivalent of the share capital is its market value.
(3)
The cash equivalent of share capital within section 249(1)(b) of ICTA (bonus share
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capital) is its market value.
(4)
For the purposes of this section, market value is determined—
(a)
in the case of listed share capital, on the date of first dealing, and
(b)
in the case of other share capital, on the earliest date on which the
company is required to issue it.
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(5)
In this section—
“listed” means listed in the Stock Exchange Daily Official List, and
“market value” has the same meaning as in sections 272(1) and (3) and
273(3) of TCGA 1992.
413
Person liable
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(1)
The person liable for any tax charged under this Chapter is the person
indicated by this section.
(2)
If section 410(2) applies, the individual is liable for the tax.
(3)
If section 410(3) applies, the trustees are liable for the tax.

Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 6 — Release of loan to participator in close company
178

(4)
If section 410(4) applies, tax is not charged under this Chapter, but see—
(a)
section 664 (under which the income treated as arising to the personal
representatives under section 410 is treated as part of the aggregate
income of the estate for the purposes of Chapter 6 of Part 5), and
(b)
section 701(8) of ICTA (under which similar provision is made for the
5
purposes of Part 16 of ICTA).
(5)
If two or more persons are entitled to the share capital on the issue of which the
stock dividend income arises, this Chapter applies as if the company issuing it
had issued to each of those persons a proportionate part of the share capital.
(6)
In subsection (5) “proportionate part” means a part proportionate to the
10
person’s interest on the earliest date on which the company is required to issue
the share capital.
414
Income tax treated as paid
(1)
A person liable to tax under this Chapter is treated as having paid income tax
at the dividend ordinary rate on the income charged, and where trustees are so
15
liable (because a cash dividend paid to them in respect of the shares would
have been to any extent income to which section 686 of ICTA applies) the
income is treated as if it had been chargeable to tax at that rate.
(2)
The income tax treated as paid under subsection (1) is not repayable.
(3)
The amount on which an individual is treated under subsection (1) as having
20
paid income tax is reduced if subsection (4) applies.
(4)
This subsection applies if the individual’s total income is reduced by any
deductions which fall to be made from the part of the income charged to tax
under this Chapter.
(5)
The reduction under subsection (3) is equal to the amount of those deductions.
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Chapter 6
Release of loan to participator in close company
415
Charge to tax under Chapter 6
(1)
Income tax is charged if—
(a)
a company is or has been assessed or is liable to be assessed under
30
section 419 of ICTA (loans to participators in close companies etc.) in
respect of a loan or advance, and
(b)
the company releases or writes off the whole or part of the debt in
respect of the loan or advance.
(2)
Subsection (1) is subject to section 418 (relief where borrowers liable as
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settlors).
(3)
Subsection (4) applies if section 419 of ICTA has effect under section 422 of that
Act (extension of section 419 to loans by companies controlled by close
companies) as if a loan or advance had been made by a company (“A”), rather
than the company (“B”) which—
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(a)
actually made it,

Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 6 — Release of loan to participator in close company
179

(b)
is regarded as having made it under section 419(2) of that Act (deemed
loans where debt incurred or assigned to close company), or
(c)
would be so regarded if it were a close company.
(4)
If the whole or part of the debt is released or written off by B, for the purposes
of subsection (1), A rather than B is treated as releasing it or writing it off.
5
(5)
Expressions used in this Chapter have the same meanings as if they were in
section 419 of ICTA.
416
Income charged
(1)
Tax is charged under this Chapter on the gross amount of the debt released or
written off in the tax year.
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(2)
The “gross amount” is the amount released or written off, grossed up by
reference to the dividend ordinary rate for that year.
(3)
For the purposes of calculating the total income of the person liable for the tax,
the amount charged is treated as income.
(4)
This section is subject to section 418 (relief where borrowers liable as settlors).
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417
Person liable
(1)
The person liable for any tax charged under this Chapter is the person to whom
the loan or advance was made.
(2)
This is subject to—
section 419 (loans and advances to persons who die), and
20
section 420 (loans and advances to trustees of trusts that have ended).
418
Relief where borrowers liable as settlors
(1)
Relief is given under this section if the person to whom the loan or advance was
made—
(a)
is liable for the tax year for income tax on a sum in respect of it under
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Chapter 5 of Part 5 as a result of section 633 (capital sums paid to settlor
by trustees of settlement), or
(b)
has been so liable for any previous tax year.
(2)
If the total amount previously charged (see subsection (4)) equals or exceeds
the total amount released (see subsection (6)), tax is not charged under this
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Chapter.
(3)
If the total amount released exceeds the total amount previously charged, tax
is charged under this Chapter on the excess, grossed up by reference to the
dividend ordinary rate.
(4)
In this section “the total amount previously charged” means the total of—
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(a)
the sums included in the person’s income under section 633 in respect
of the loan or advance for the tax year or for previous tax years, and
(b)
the amounts charged under this Chapter in respect of the loan or
advance for previous tax years.

Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 6 — Release of loan to participator in close company
180

(5)
For the purposes of subsection (4)(a), section 640(1) (which requires the
grossing up of the sums treated as paid to the settlor by reference to the rate
applicable to trusts) is ignored.
(6)
In this section “the total amount released” means the total amount released or
written off in respect of the loan or advance in the tax year and previous tax
5
years.
419
Loans and advances to persons who die
(1)
This section applies if—
(a)
a loan or advance is made to a person who dies,
(b)
a company is or has been assessed or is liable to be assessed under
10
section 419 of ICTA (loans to participators in close companies etc.) in
respect of the loan or advance, and
(c)
after the death the company releases or writes off the whole or part of
the debt in respect of the loan or advance.
(2)
Tax is not charged under this Chapter if at the time of the release or writing off
15
the debt is due from the person’s personal representatives in that capacity, but
see—
(a)
section 664 (under which the amount that would be so charged is
treated as part of the aggregate income of the estate for the purposes of
Chapter 6 of Part 5), and
20
(b)
section 701(8) of ICTA (under which similar provision is made for the
purposes of Part 16 of ICTA).
(3)
If subsection (2) does not apply, tax is charged under this Chapter on the
person from whom the debt is due at the time of release or writing off.
420
Loans and advances to trustees of trusts that have ended
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(1)
This section applies if—
(a)
a loan or advance is made to trustees of a trust,
(b)
a company is or has been assessed or is liable to be assessed under
section 419 of ICTA (loans to participators in close companies etc.) in
respect of the loan or advance, and
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(c)
after the trust has ended the company releases or writes off the whole
or part of the debt in respect of the loan or advance.
(2)
Tax is charged under this Chapter on the person from whom the debt is due at
the time of release or writing off.
421
Income tax treated as paid
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(1)
A person liable to income tax under this Chapter is treated as having paid
income tax at the dividend ordinary rate on the amount charged under this
Chapter.
(2)
The income tax treated as paid under subsection (1) is not repayable.
(3)
The amount on which an individual is treated under subsection (1) as having
40
paid income tax is reduced if subsection (4) applies.

Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 7 — Purchased life annuity payments
181

(4)
This subsection applies if the individual’s total income is reduced by any
deductions which fall to be made from the part of the income charged under
this Chapter.
(5)
The reduction is equal to the total amount of those deductions.
Chapter 7
5
Purchased life annuity payments
422
Charge to tax on purchased life annuity payments
(1)
Income tax is charged on annuity payments made under a purchased life
annuity.
(2)
For exemptions, see in particular—
10
(a)
section 717 (exemption for part of purchased life annuity payments),
(b)
section 725 (annual payments under immediate needs annuities),
(c)
section 731 (periodical payments of personal injury damages), and
(d)
section 732 (compensation awards).
423
Meaning of “purchased life annuity”
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(1)
In this Chapter “purchased life annuity” means an annuity—
(a)
granted for consideration in money or money’s worth in the ordinary
course of a business of granting annuities on human life, and
(b)
payable for a term ending at a time ascertainable only by reference to
the end of a human life.
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(2)
For this purpose it does not matter that the annuity may in some circumstances
end before or after the life.
424
Income charged
(1)
Tax is charged under this Chapter on the full amount of the annuity payments
arising in the tax year.
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(2)
Subsection (1) is subject to Part 8 (foreign income: special rules).
425
Person liable
The person liable for any tax charged under this Chapter is the person
receiving or entitled to the annuity payments.
426
Annuity payments received after deduction of tax
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Income tax deducted under either of the following sections from an annuity
payment within this Chapter is treated as income tax paid by the recipient—
section 348(1)(b) of ICTA (under which income tax may be deducted from
some payments by the payer), and
section 349(1)(a) of that Act (under which income tax must be deducted
35
from some payments by the payer).

Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 8 — Profits from deeply discounted securities
182

Chapter 8
Profits from deeply discounted securities
Charge to tax under Chapter 8
427
Charge to tax on profits from deeply discounted securities
(1)
Income tax is charged on profits on the disposal of deeply discounted
5
securities.
(2)
The profits are treated as income for income tax purposes if they would not
otherwise be income.
428
Income charged
(1)
Tax is charged under this Chapter on the full amount of profits arising in the
10
tax year.
(2)
The profits on a disposal are to be taken to arise when the disposal occurs.
(3)
If the profits arise on a disposal of securities that are outside the United
Kingdom—
(a)
they are treated for the purposes of section 830 (meaning of “relevant
15
foreign income”) as arising from a source outside the United Kingdom,
and
(b)
subsection (1) is subject to Part 8 (foreign income: special rules).
(4)
Subsection (2) needs to be read with section 438 (timing of transfers and
acquisitions).
20
429
Person liable
(1)
The person liable for any tax charged under this Chapter is the person making
the disposal.
(2)
See section 437 for who that person is.
Deeply discounted securities
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430
Meaning of “deeply discounted security”
(1)
The general rule is that a security is a “deeply discounted security” for the
purposes of this Chapter if, as at the time it is issued, the amount payable on
maturity or any other possible occasion of redemption (“A”) exceeds or may
exceed the issue price by more than—
30

where Y is the number of years in the redemption period or 30, whichever is
the lower.
(2)
If the redemption period is not a number of complete years, for the purposes
of subsection (1) the incomplete year is expressed as twelfths, treating each
complete month and any remaining part of a month as one-twelfth.
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