House of Commons - Explanatory Note
Income Tax (Trading and Other Income) Bill - continued          House of Commons

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Clause 451: Market value of strips etc. quoted in foreign stock exchange lists

373.     This clause provides the rules for ascertaining the market value of overseas strips or securities quoted on a foreign stock exchange. It is based on paragraph 14E of Schedule 13 to FA 1996.

374.     Subsections (4) and (5) make provision for cases where the mechanics of overseas stock exchanges might differ from those in the United Kingdom, in particular where separate buy and sell prices are not given.

375.     Subsection (6) acts as a tie-breaker where the strip or security is listed on more than one foreign exchange.

Clause 452: Power to modify this Chapter for strips

376.     This clause allows the Treasury to make regulations for the treatment of strips as a response to future developments in the strips market. It is based on paragraph 14 of Schedule 13 to FA 1996.

Clause 453: Application of sections 454 to 456

377.     This clause is the first of four clauses providing special rules for securities held since 26 March 2003. FA 2003 introduces several changes to Schedule 13 to FA 1996 which affect securities held after that date. It is based on paragraph 6 of Schedule 39 to FA 2003.

378.     With the one exception for government strips, loss relief is no longer available for disposals on or after 27 March 2003, nor is there a deduction for incidental expenses incurred on or after that date. Where, however, a deeply discounted security held since before that date is disposed of, loss relief is still available if the security is listed on a recognised stock exchange. Although the provisions for these reliefs are repealed by FA 2003 for securities acquired after 26 March 2003 they are rewritten in this Chapter to make it easier for the taxpayer with securities acquired before 27 March 2003 to ascertain the relevant rules. Paragraph 7 of Schedule 13 to FA 1996 which deals with losses on certain exempt income is rewritten in Schedule 2 to this Bill as it is of limited application.

Clause 454: Listed securities held since 26th March 2003: relief for losses

379.     This clause provides for any loss sustained on the disposal of a listed deeply discounted security to be relieved by set-off and explains when a loss is incurred. It is based on paragraphs 2 and 6 of Schedule 13 to FA 1996.

380.     Subsection (2) provides that a loss is incurred where the amount paid on acquisition exceeds the amount paid on disposal disregarding any incidental costs. Incidental costs may increase the loss but not create a loss. See clause 455 for how the loss is computed

381.     Subsection (3) signposts clause 455(2) to (4) which allow costs in computing the profit where the security has been continuously held since 26 March 2003.

382.     The set-off rules for persons who are not trustees (subsection (4)) differ from those for trustees (subsection (5)).

383.     See the entry in Part 5 of Schedule 2 to this Bill for further provisions on trustees.

Clause 455: Listed securities held since 26th March 2003: calculating the profit or loss on disposals

384.     This clause gives the rules for computing profits and losses on disposals of securities held continuously since 26 March 2003. Deductions for incidental expenses of acquiring and disposing of deeply discounted securities are only available for listed securities held on 26 March 2003. The clause is based on paragraphs 1, 2, 14 and 15 of Schedule 13 to FA 1996.

385.     Subsections (2) and (3) explain how to compute the loss referred to in clause 454(2). The loss sustained is effectively increased by the deduction of the incidental expenses incurred in connection with the acquisition and disposal of the security. This is expressed by allowing the costs, which include both sets of incidental expenses and the cost of acquisition, as a deduction from the disposal proceeds.

Clause 456: Securities issued to connected persons etc. at excessive price: subsequent transfers to connected persons

386.     This clause prevents a loss arising on the transfer of deeply discounted securities where securities are issued at a value above that at which they are subsequently transferred and the issue and transfer are to connected persons. The clause is based on paragraph 9A of Schedule 13 to FA 1996.

387.     The market value rules in clauses 440 and 441 do not apply to securities on issue but only to subsequent disposals. The application of those rules therefore produces a loss where a security has been issued at above the market value to a connected person and is then transferred to another connected person at its true market value. These transactions thereby benefit from the fact that the market value rules do not apply on issue, and when they might apply, on a transfer, the price is at market value.

388.     Subsection (1) provides the general rule that no loss will arise where certain conditions are met. These conditions are set out in subsections (2) to (6).

389.     The conditions in subsections (2) and (3) must both apply, together with either the condition in subsection (4) or those in both subsections (5) and (6). These conditions provide that the person disposing of the security was either connected with the issuing company or controlled it and that the security was acquired on issue at above market value.

390.     It is considered unnecessary to rewrite paragraph 9A(2)(b) of Schedule 13 to FA 1996, because if the transferor were connected with the issuer condition C (paragraph 9A(1)(b) of that Schedule) would apply.

391.     Subsections (5) and (7) ensure that the rule also applies where a deeply discounted security is issued by a close company where the person to whom it is issued, together with others, controls the issuing company, wherever the company is resident.

Clause 457: Trustees

392.     This clause gives rules for applying this Chapter to trustees. It is based on paragraph 6 of Schedule 13 to FA 1996.

393.     Under clause 429 the person liable is the person making the disposal.

394.     Subsection (2) ensures that the profits are treated, for the purposes of Chapter 5 of Part 5 of this Bill, as income arising under a settlement and therefore potentially chargeable on the settlor.

395.     Subsection (3) ensures that the profits are treated as income in applying the rules on the liability of trustees in Chapter 1C of Part 15 of ICTA.

396.     Paragraph 6(1) of Schedule 13 to FA 1996 refers to amounts "treated as income chargeable to tax". This must simply mean 'chargeable to tax' since paragraph 1 of that Schedule makes use of a straightforward charge on the gain rather than a deemed income approach. The "deemed" wording has not been reproduced. But the wording of the charge has been reflected in clause 427.

397.     Subsection (5) disapplies subsections (2) to (4) in the case of unauthorised unit trusts. Under section 469(2) of ICTA income arising to the trustees of unauthorised unit trusts is regarded as income of the trustees and not as income of the unit holders and such income is chargeable at the basic rate.

Clause 458: Non-UK resident trustees

398.     This clause provides that non-UK resident trustees are not charged to tax on profits and gains from deeply discounted securities. It is based on paragraph 6 of Schedule 13 to FA 1996.

Clause 459: Transfer of assets abroad

399.     Sections 739 and 740 of ICTA provide rules to counter avoidance of income tax by the transfer of assets abroad. They depend on income being payable to a person resident or domiciled outside the United Kingdom which a person domiciled or resident within the United Kingdom has the power to enjoy. This clause provides that profits on a disposal of deeply discounted securities by a non-UK resident or non-UK domiciled person are regarded as income paid to that person for the purpose of those rules. The clause is based on paragraph 12 of Schedule 13 to FA 1996.

Clause 460: Minor definitions

400.     This clause provides some minor definitions for the provisions in this Chapter. It is based on section 103 of FA 1996 and paragraph 15 of Schedule 13 to FA 1996 and paragraph 14 of Schedule 25 to FA 2002.

Chapter 9: Gains from contracts for life insurance etc.


401.     This Chapter charges to tax the investment profit from life insurance policies, life annuity contracts and capital redemption policies. It is based on Chapter 2 of Part 13 of ICTA.

402.     The Chapter uses "gains" to describe what is charged to tax, as in the source legislation. The term "profits" is not used because it has different, well established meanings in the context of policies of life insurance etc. For example, the insurance industry uses "profits", as in "with profits" policies, to describe bonuses which are not "gains" within the meaning of this charge.

403.     Whereas the source legislation deals separately with each type of policy and contract falling within this charge, the Chapter deals with all three types at the same time, so far as possible, while still preserving any differences in the rules.

404.     Most of the policies and contracts to which the Chapter applies are held by individuals or on trusts created by individuals. But the Chapter deals with all circumstances under which gains are charged to income tax, irrespective of the capacity of the policy holder.

405.     Where the gain is charged to corporation tax (that is, when the policy or contract is held by a company, or on trusts created by a company, or as security for a debt owed by a company, and the company is within the charge to corporation tax), the relevant provisions are in Chapter 2 of Part 13 of ICTA, as amended by Schedule 1 to this Bill.

406.     The income tax and corporation tax provisions for charging gains apply independently to any policy or contract. But a charge to tax under one or other tax (sometimes to both taxes) will only arise if someone is liable for the respective tax on the gain.

407.     Life insurance policies certified by the Inland Revenue as "qualifying policies", under paragraph 21 of Schedule 15 to ICTA, will not generally give rise to gains under this Chapter. The rules in Schedule 15 to ICTA include that:

  • the policy must have a minimum term of ten years from the date it was made to the date it is due to end; and

  • premiums of fairly even amounts must be payable at regular intervals in every year for at least ten years.

408.     Qualifying policies generally give rise to gains chargeable to tax if a "chargeable event" occurs:

  • before the earlier of ten years from the beginning of the policy or three-quarters of the term for which it is due to run; or

  • after the policy has - before the earlier of those two periods - been made a "paid up" policy.

409.     The Chapter makes a number of minor changes to the law. It includes provisions based on some extra-statutory concessions.

410.     The Chapter also incorporates much of the secondary legislation for the special charge on personal portfolio bonds (the Personal Portfolio Bonds (Tax) Regulations 1999 SI 1999/1029, as amended by SI 2001/2724 and SI 2002/455). In this commentary, those regulations are abbreviated as "PPB(T)R".

411.     Date-related provisions (that is, provisions which apply only to policies or contracts issued before a particular date) are located in Parts 6 and 7 of Schedule 2 to this Bill. Those Parts are organised chronologically so that policy holders can see whether any rules qualify the provisions in the Chapter, in relation to their own policies or contracts. Clause 546 indicates when Schedule 2 to the Bill modifies the operation of the clause and the relevant paragraph(s) of the Schedule.

412.     A few date-related provisions have been retained within this Chapter where it would be unhelpful to remove them.

413.     There are also some relevant provisions in Part 5 of Schedule 2 to the Bill, which depend on dates other than the date of issue of a policy or contract.

414.     The Chapter is laid out as follows-

  • charge to tax under Chapter 9 (clauses 461 to 463)

  • person liable etc. (clauses 464 to 472)

  • policies and contracts to which Chapter 9 applies (clauses 473 to 483)

  • when chargeable events occur: general (clauses 484 to 490)

  • calculating gains: general (clauses 491 to 497)

  • part surrenders and assignments: periodic calculations and excess events (clauses 498 to 509)

  • transaction-related calculations and part surrender or assignment events (clauses 510 to 514)

  • personal portfolio bonds (clauses 515 to 526)

  • reductions from gains (clauses 527 to 529)

  • income tax treated as paid and reliefs (clauses 530 to 538)

  • deficiencies (clauses 539 to 541)

  • supplementary (clauses 542 to 546)

Clause 461: Charge to tax under Chapter 9

415.     This clause charges gains from policies and contracts to tax. It is based on, and combines:

  • the charge in section 547(1) of ICTA (which stands outside the schedular system);

  • the charges under Schedule D Case VI in sections 547(6) and 553(6) of ICTA; and

  • the special charge on personal portfolio bonds in regulation 6 of PPB(T)R.

416.     The exemption mentioned in subsection (4) is not an exhaustive statement of exemptions that may apply.

Clause 462: When gains arise from policies and contracts

417.     This clause explains when a gain arises and introduces the concept of a "chargeable event". It is based on sections 540, 542, 545 and 546C of ICTA.

Clause 463: Income charged

418.     This clause is based on section 547 of ICTA. It sets out the amount charged to tax.

419.     Subsection (2) flags the one circumstance where the gain to be charged for a year may have arisen in an earlier tax year. That is, the tax year for the charge is not the tax year in which the chargeable event occurred.

Clause 464: Person liable for tax: introduction

420.     This clause and the following three clauses determine who is liable for any tax charged under this Chapter. Clauses 466(3) and 468 indicate when a gain arising under this Chapter is not charged under this Chapter but may be taken into account for certain other income tax charges. The clause is based on section 547 of ICTA.

421.     The source legislation does not preclude an overlap between the attribution of liability to one "person liable" and to another (say, both to an individual who placed a policy in trust and to the trustees who hold the legal rights in the policy). In practice, attribution of liability to a UK resident individual will normally prevail over another type of attribution. See also the commentary on clause 467 as it applies where the rights are held by trustees on charitable trusts.

422.     Subsection (3) provides that references in clauses 464 to 467 to a surrender or assignment of rights refer, where appropriate, to a surrender or assignment of a part of, or share of, the rights. A part of the rights means one or more discrete rights provided by the policy or contract. A share in the rights means part of the ownership, where there are multiple owners, of such a discrete right or rights or of all the rights in the policy or contract. (The rule applied in this subsection is also found elsewhere in the Chapter.)

Clause 465: Person liable: individuals

423.     This clause sets out three ways of holding or owning the rights under which an individual may be liable to tax on the gain. Where an individual is so liable, the amount charged is treated as part of the individual's "total income" (section 835 of ICTA). This clause is based on section 547 of ICTA.

424.     Although simple beneficial ownership of the rights may be the most commonly met circumstance, policies and contracts are commonly placed in trust for beneficiaries (whether the settlor and/or others are the beneficiaries). They may also be used to secure a loan (such as a mortgage of property). If any of the three circumstances applies, that is sufficient to attribute liability for tax on the gain to that individual.

425.     Subsection (1) incorporates part of ESC B53. Under the concession, the Inland Revenue will not pursue liability to tax on a gain, where a non-UK resident individual is liable, in any of the circumstances mentioned in this subsection. The clause simply limits attribution of liability to UK resident individuals, so that the non-UK resident individual is not liable to tax on the gain in the first place. See Change 88 in Annex 1.

426.     Chapter 1 of Part 4 of this Bill provides a general territorial limitation on the scope of the Part. As regards income arising outside the United Kingdom, it limits the charge to such income arising to a UK resident. See clause 368 (territorial scope of Part charges) and the related commentary on that Chapter. That Chapter and this clause ensure that a non-UK resident individual is not liable to tax under this Chapter on any gains, whether arising in the United Kingdom or elsewhere.

427.     Subsection (6) clarifies that an individual will be treated as creating a trust, for the purposes of this Chapter, when a policy or contract is placed in trust under any of three specific Acts. Such trusts are commonly created, for example, when a policy (such as a mortgage protection policy) is to benefit one or both parties to a marriage. But the subsection is not an exhaustive definition of all the circumstances in which trusts are created by an individual.

Clause 466: Person liable: personal representatives

428.     This clause sets out how a gain is to be charged to tax when the rights under the policy or contract are held by the personal representatives of a deceased person's estate. It is based on sections 547 and 553 of ICTA. The term "personal representatives" is defined in clause 878.

429.     There are two possible treatments. The first is conditional on the policy or contract being one that, were an individual liable to tax in respect of the gain arising on that policy or contract, no lower rate income tax allowance would be available under clause 530. Broadly, that allowance is not given where the investment profits underlying the policy or contract are not subject to tax in the hands of the insurer. That may be because the investment profits were not so taxed in the hands of a United Kingdom based insurer or the policy or contract was held with a non-United Kingdom based insurer (and there was no equivalent foreign tax charge on investment profits in the hands of the insurer).

430.     Where this condition applies, the gain is taxable on the personal representatives as their income in that capacity. The personal representatives are thus liable for the tax.

431.     If the condition does not apply, the gain is not charged on the personal representatives under this Chapter. Instead, the gain falls into the "aggregate income of the estate of the deceased" for the purposes of Chapter 6 of Part 5 of this Bill (see clause 664 (the aggregate income of the estate)) and of Part 16 of ICTA.

Clause 467: Person liable: UK resident trustees

432.     This clause sets out to what extent UK resident trustees are liable for the tax charged on a gain. It is based on section 547 of ICTA. The clause sets out four circumstances under any of which trustees will be liable. All four circumstances depend wholly or partly on how the rights under the policy or contract are held immediately before the chargeable event in question occurs. There are significant differences of treatment between trustees of charitable trusts and non-charitable trusts.

433.     Where the rights are held on charitable trusts, the liability falls on the trustees rather than on any settlor. However, the tax charge on the trustees is at the lower rate only. So there will be no net liability where the lower rate income tax allowance under clause 530 is available.

434.     If the rights are held on non-charitable trusts, the trustees are liable where:

  • the settlor is non-UK resident, or is dead, or is a company or foreign institution that no longer exists (that is, the settlor could not be liable to tax on the gain or - as regards a foreign institution - be instrumental in the gain being taken into account for the purposes of section 740 of ICTA - see clause 468); or

  • the rights are held in any other circumstances excluding those already taken into account under clauses 465 (where an individual is liable) or 466(1) (where personal representatives are liable), or under section 547(1)(b) of ICTA (where a company is liable).

435.     The trustees of both charitable trusts and non-charitable trusts are liable where condition D applies.

436.     See also clause 546 (Table of provisions subject to special rules for older policies and contracts).

Clause 468: Non-UK resident trustees and foreign institutions

437.     This clause sets out in what circumstances a gain treated as arising under this Chapter is taken into account under section 740 of ICTA (liability of non-transferors). It is based on section 547 of ICTA.

438.     It applies when the rights under the policy or contract are held by, or held as security for a debt owed by:

  • non-UK resident trustees; or

  • a "foreign institution".

439.     As regards trustees, the same four circumstances (Conditions A to D) of clause 467 apply, with the substitution of non-UK resident trustees for UK resident trustees, to determine whether this clause applies. But the clause makes no other distinction between cases where rights are held on charitable trusts or non-charitable trusts.

440.     A gain taken into account for the purposes of section 740 of ICTA, as modified by this clause, is not charged under this Chapter.

441.     Subsection (6) qualifies the meaning of "rights", where there has been an assignment or surrender of a part of or share in the rights, in the same way as does clause 464 (see the commentary on that clause).

Clause 469: Two or more persons interested in policy or contract

442.     This clause, together with clauses 470 to 472, is based on section 547A of ICTA. These clauses deal with cases where the rights in a policy or contract (or a share in those rights) are held immediately before the chargeable event:

  • by more than one person;

  • by one person in respect of different shares held in different capacities; or

  • on non-charitable trusts created by two or more persons.

443.     The most common instance of this is where a husband and wife are co-owners of a policy or contract.

444.     The clause apportions the gain in proportion to the "material interest" of each person with such an interest (see clause 470). It treats each person with a material interest separately, for the purpose of assigning liability to tax etc, disregarding for this purpose how the Chapter applies in respect of a material interest held by another person. It also apportions deficiencies for the purposes of the relief given by clause 539.

445.     Although the source legislation has effect for the purposes of section 547 of ICTA only, this clause operates by reference to provisions that apply for the purposes of the Chapter. As a result of the significant reordering of the source legislation when rewriting it, section 547 of ICTA is the basis of numerous clauses at various locations. The application of this clause to clauses that operate in a Chapter-wide context is a necessary consequence.

446.     Subsection (6) applies the clause to someone who has two or more interests in a policy or contract exactly as the clause applies where two or more persons have such interests. For example, a person may hold one interest beneficially and the other as a trustee. Each of those interests is treated separately. But there is an exception where all the material interests are held by that person only (that is, the interests are not shared) and are held in the same capacity. For example, one share may be beneficially owned by A, but held in a trust, and another share held by A absolutely. Both shares are held in the same capacity.

447.     Subsection (7) is similar in effect to the equivalent subsection in clause 464 and clause 468. See the commentary on clause 464.

Clause 470: Interests in rights under a policy or contract for section 469

448.     This clause provides the meaning of "material interest" for the purposes of clause 469. It is based on section 547A of ICTA. The circumstances in which someone is regarded as having an interest in rights under a policy or contract for this purpose mirror the circumstances set out in clauses 465 to 468 (and, as regards companies chargeable to corporation tax, section 547 of ICTA) for attributing liability to tax on gains or otherwise taking gains into account for tax purposes.

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Prepared: 3 December 2004