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

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Clause 516: Meaning of "personal portfolio bond"

600.     This clause is based on regulation 4 of PPB(T)R. All of the types of policy or contract mentioned in clause 473(1) have the potential to be a personal portfolio bond, if conditions A and B in this clause are met. But, if they do, the exclusions mentioned in subsection (3) of clause 473 also apply to take such policies and contracts out of the scope of this special charge.

601.     Subsection (2) sets out condition A. This is the portfolio element in a personal portfolio bond.

602.     Subsection (4) sets out condition B. This is the personal element in a personal portfolio bond. The list of persons who may be able to select property or an index includes, for example, a financial adviser who acts on behalf of a policy holder, as well as anyone "connected" with the policy holder. Clause 878 in Part 10 applies the "connected persons" rules in section 839 of ICTA for the purposes of this Bill.

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

Clause 517: Policies and contracts which are not personal portfolio bonds

604.     This clause introduces a let-out from the charge on personal portfolio bonds for policies and contracts where an index or property is, broadly speaking, of a public or not unusually restricted nature. Many unit-linked policies benefit from this let-out. This clause is based on regulation 4 of PPB(T)R.

Clause 518: The index categories

605.     This clause is based on regulation 4 of PPB(T)R.

606.     Schedule 4 to this Bill indicates that the definitions of "retail prices index" in section 833(2) of ICTA and "recognised stock exchange" in section 841(1) of ICTA apply.

Clause 519: The index selection conditions

607.     This clause is based on regulation 4 of PPB(T)R. The selection conditions seek to ensure that the opportunity to select is not narrowly restricted. While occasionally that opportunity will be made available to all policy holders of an insurer, or their agents (the "general selection condition"), more often there will be various products linked to a number of indices, when the opportunity to select will be offered to one or more large classes of policy holder, or their agents (the "class selection condition").

608.     It is made explicit that it is immaterial, in respect of both the general and the class selection conditions, whether the opportunity is offered to the policy holders themselves or to their agents (such as financial advisers).

Clause 520: The property categories

609.     This clause is based on regulation 4 of PPB(T)R.

610.     Categories 1 to 4 and 7 are types of collective investment scheme, whether based in the United Kingdom or elsewhere, which satisfy the appropriate rules of investment regulatory bodies.

611.     Category 5 is cash, so long as the cash is not held to realise a profit on selling it. Such a profit may only be realised on foreign currency.

612.     Category 6 is an investment in a policy or contract to which this Chapter applies, other than one that is, or is in any way related to, a personal portfolio bond. "Related property", a term used in subsection (3)(c), in relation to any policy or contract (or the premiums paid on it), means income which derives directly or indirectly from holding the policy or contract, or investing in it. In the source legislation, this term is defined by reference to section 660A(10) of ICTA, but that provision is rewritten in Chapter 5 of Part 5 of this Bill.

Clause 521: The property selection conditions

613.     This clause is based on regulation 4 of PPB(T)R. The commentary on clause 519 applies equally here.

Clause 522: Method for making annual calculations under section 515

614.     This clause is based on regulation 5 of PPB(T)R. It takes a similar approach to that used in the other required calculations in this Chapter, that is, a calculation formula plus supporting method statements to find the amounts relevant to the formula.

615.     However, whereas in those other calculations the figure found by applying the formula produces the amount of the gain, subsection (4) sets the gain at 15% of the figure found by applying the formula.

616.     Any year in which the policy or contract is not a personal portfolio bond nevertheless enters the calculation. So the relevant premiums, previous gains under this clause and excess events are those of any insurance year of the policy or contract. Where the regulation refers to a year in which the bond was in existence, this means a year when the policy or contract was in existence, rather than a year in relation to which the policy was a personal portfolio bond. The term "personal portfolio bond" is used in the regulation merely to identify the policy or contract in question.

Clause 523: The total amount of personal portfolio bond excesses

617.     This clause is based on regulation 5 of PPB(T)R.

Clause 524: The total amount of part surrender gains

618.     This clause is based on regulation 5 of PPB(T)R.

619.     The exclusions made by subsections (4) and (5) affect assignments. That type of transaction has frequently been used in tax planning to avoid the charge rewritten in this Chapter.

620.     Because of the change of approach mentioned in the commentary on clause 510, the calculations under clauses 507 and 511 are independent (albeit sharing some features). It is therefore unnecessary to rewrite paragraph 5(2B)(c) of PPB(T)R, as the provisions mentioned there contribute only to the calculation under clause 511.

Clause 525: Chargeable events where annual calculations show gains

621.     This clause is based on regulations 5 and 6 of PPB(T)R.

Clause 526: Power to make regulations about personal portfolio bonds

622.     This clause is based on section 553C of ICTA. But the powers given here for the Treasury to make regulations apply only to certain aspects of the charge on gains treated as arising under clause 525. See Change 94 in Annex 1.

623.     The regulations contained in PPB(T)R, in so far as they apply to determine the amount of the gain under the special charge and how that gain is charged to income tax, are rewritten in the preceding clauses. The regulations remain in place in respect of calculating and charging gains to corporation tax. The regulations also remain in place as regards the duties of insurers in sections 552 to 552B of ICTA.

624.     To the extent that the regulations are rewritten for income tax purposes in these clauses, the powers in section 553C of ICTA are spent.

625.     The power given is to make regulations about the administration of this charge, which in practice means regulations in connection with the duties of insurers.

Clause 527: Reduction for sums taken into account otherwise than under Chapter 9

626.     This clause is based on section 547 of ICTA. It prevents a double charge to tax where a sum, which is taken into account in calculating a gain under this Chapter, also falls to be taken into account in computing another type of taxable income. For example, it might also constitute a trading receipt.

627.     This rule is provided because the process for determining when a chargeable event occurs, and how much the gain is, does not sit well with the usual procedure for ensuring that income is taxed under one charging provision only. That is, it may be necessary for such receipts to be brought into a calculation under this Chapter before it can be determined whether a chargeable event has occurred or a gain has arisen. Clause 366 permits inclusion of such receipts in more than one computation.

628.     Although the source legislation is in terms of an amount taxable under section 547(1) of ICTA and an "amount which is chargeable to tax" apart from that subsection, the clause reduces the gain otherwise chargeable by the "amount of the receipt or other credit item" taken into account in the other calculation. "Credit item" is not a defined term, but is used in, for example, clause 4. See Change 95 in Annex 1.

Clause 528: Reduction in amount charged: non-UK resident policy holders

629.     This clause is based on section 553 of ICTA. In effect, it exempts the part of the gain on foreign policies that represents investment profit for the period when the policy holder was not resident in the United Kingdom. The reduction does not apply to gains arising on life annuity contracts.

630.     The reduction is proportionate to the period during the course of the policy, measured to the date the chargeable event occurred, in which the policy holder was not UK resident. This method reverses the approach in the source legislation, where the calculation produces the amount of the reduced gain, rather than the amount by which the gain is reduced.

631.     The policy holder and the person or persons liable to tax on the gain may not be the same.

632.     Subsections (5) and (6) provide a special rule for a "new policy". Under paragraph 17 of Schedule 15 to ICTA that is a policy which is issued in substitution for, or on the maturity of, an earlier policy (as a result of exercising an option contained in the earlier policy). Where there has been one or more replacements the course of the policy is taken to run from the earliest original policy.

Clause 529: Exceptions to section 528

633.     This clause is based on section 553 of ICTA.

634.     Because the reduction under clause 529 is not made if the policy is held by non-UK resident trustees, it is the unreduced gain which is taken into account for the purposes of section 740 of ICTA where clause 468 applies.

635.     Subsection (2) applies the rules in section 110 of FA 1989, which determine when a body of trustees, one or more of whom would be regarded as resident in the United Kingdom and one or more of whom would not be so regarded, are all to be regarded as resident in the United Kingdom or not so resident.

636.     The source legislation does not take account of section 110 of FA 1989. Although section 110 of FA 1989 applies only to 1989-90 and subsequent years, it is applied here in respect of all earlier years where necessary, as it would be impractical to apply the provision using two different tests of residence status. See Change 96 in Annex 1.

637.     See also clause 546 (Table of provisions subject to special rules for older policies and contracts). Change 96 is not applied in the associated paragraph of Schedule 2 to the Bill as that paragraph refers to a time wholly before the rule introduced by FA 1989 applies.

Clause 530: Income tax treated as paid etc.

638.     This clause sets out when (subject to clause 531) an income tax allowance is available to set off against the tax chargeable on the gain. It is based on section 547 of ICTA.

639.     The allowance is an amount equivalent to the lower rate of income tax on the gain (see section 1A(1B) of ICTA). It is treated as tax paid by the individual or trustees liable to tax on the gain. The allowance is not available to personal representatives who are so liable.

640.     An individual whose income is chargeable at the higher rate (see section 1(2)(b) of ICTA) will pay tax at that rate on the gain, against which the allowance can be set.

641.     The trustee or trustees of a non-charitable trust pay tax at the rate applied by section 686(1AA)(b) of ICTA, subject to the set-off of the allowance. The trustee or trustees of a charitable trust pay tax on gains at the lower rate (see clause 467(7)(a)), and will therefore have no net liability where the allowance is due.

642.     Taxpayers whose income is chargeable at the starting, lower or basic rates only, and non-taxpayers, have no further income tax liability when the allowance is due.

643.     Subsection (2) provides that the tax treated as paid is not repayable even if the individual (or the trustee or trustees) is a non-taxpayer or the allowance exceeds the tax charged on the gain.

644.     Subsection (3) caps the allowance when the net income chargeable to tax is reduced below the amount of the gain because of other deductions. The allowance is reduced accordingly.

645.     Subsection (6) ensures that the starting rate of tax (section 1(2)(aa) of ICTA) does not apply when calculating the liability to tax on a gain of an individual who is entitled to the allowance.

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

Clause 531: Exceptions to section 530

647.     Broadly, this clause denies the income tax allowance provided by clause 530 to policies and contracts where the underlying investment profit is not subject to UK tax. Where this clause applies, the tax charge for the person liable includes the starting rate of income tax (section 1(2)(aa) of ICTA) where applicable. It is based on sections 547, 553 and 553A of ICTA.

648.     This clause is disregarded for the purposes of a top-slicing relief calculation (see clauses 535 to 537) so that the calculation assumes there was an income tax allowance.

649.     And the income tax allowance may be available where the policy or contract is with a European Economic Area ("EEA") or other non-UK resident insurer (subsection (2)), or where a foreign policy of life insurance is issued by the UK branch of a non-UK resident insurer (subsections (5) and (6)). In these circumstances, the underlying investment profit has been subject to UK tax or to comparable tax in an EEA or other country.

650.     Subsection (5) refers only to policies which are foreign policies of life insurance under the first part of the definition in clause 476(3), and not to policies under the second part. This preserves the intended operation of section 553(7) of ICTA for such policies despite the apparent override of that provision in section 553A(3) of ICTA for all foreign policies. See Change 97 in Annex 1.

651.     Subsection (3) sets out the types of policies and contracts which are excepted by this clause from clause 530.

652.     Paragraph (a) makes clear that life annuity contracts issued by a friendly society in its tax-exempt business are within the exception, as well as life insurance policies so issued, despite the reference in the source legislation to policies only. Section 547(7) of ICTA applies to gains under both sections 541 and 543 of ICTA. Its opening words are "Where under section 541, 543 or 546C(7)(b), a gain is to be treated as arising in connection with a policy..". However, while section 541 of ICTA deals with gains on policies, section 543 of ICTA deals with gains on contracts for life annuities. Section 547(7) of ICTA therefore applies to contracts for life annuities.

653.     Paragraph (b) indicates clause 530 does not apply to a gain on a foreign policy of life insurance unless the policy meets conditions which indicate that the underlying investment profit earned by the policy has borne UK tax.

Clause 532: Relief for policies and contracts with European Economic Area insurers

654.     This clause and the following clause are based on sections 547 and 553 of ICTA. This clause sets out when the income tax allowance provided by clause 530 may be available for a gain on a foreign policy or contract, despite the exception in clause 531. It applies where:

  • a claim is made under this clause;

  • the insurer conditions (conditions A and B) are satisfied; and

  • reinsurance of a particular type (see the definition of "excluded reinsurance contract" in subsection (5)) has not been made in respect of the policy or contract (condition C).

655.     In relation to "policies", the clause makes clear that the relief provided extends to foreign capital redemption policies as well as to life insurance policies.

656.     Subsection (1) sets out that a claim under this clause must simply be made, rather than made to the Inland Revenue, or (as in the source legislation) to the Board of Inland Revenue. See Change 149 in Annex 1.

657.     The definition of "policy period" in subsection (5) excludes any period when the policy or contract has already been subject to UK tax on the underlying investment profit.

Clause 533: Meaning of "comparable EEA tax charge"

658.     This clause sets out the requirement for the purposes of clause 532 that the tax charge applied to the EEA insurer is at least broadly equivalent to that applying to insurers operating in the United Kingdom. This clause is based on sections 547 and 553 of ICTA.

659.     The term "insurer" in subsection (1) recognises that the range of bodies issuing policies or contracts in another EEA country may be different from that met in the United Kingdom, and is not necessarily equivalent to an insurance company. And for that reason, the term "insurance company" (which is defined in clause 545) has not been used here.

Clause 534: Regulations providing for relief in other cases where foreign tax chargeable

660.     This clause is based on section 56(3) of FA 1995. It gives the Board of Inland Revenue power to make regulations which provide the same relief as does clause 532 where:

  • the insurer is not resident in a EEA country or territory;

  • the insurer is subject to tax in that non-EEA country or territory (as described in clause 532); and

  • a claim for the relief is made.

661.     No regulations have been made yet under section 56(3) of FA 1995.

Clause 535: Top slicing relief

662.     This clause, and clauses 536 and 537, are based on section 550 of ICTA. They provide a relief where the gain charged under this Chapter takes an individual's taxable income into the higher rate of tax. The relief reduces or eliminates the higher rate charge.

663.     The relief is given by reducing the amount of tax charged on the gain, or by repayment. It is given without a claim being required. See Change 98 in Annex 1.

664.     The relief is calculated by comparing the tax chargeable on the gain (or gains) with the tax that would be chargeable on a fraction of the gain, in both cases after setting off the appropriate income tax allowance under clause 530. The fraction (the "annual equivalent") is calculated by reference to the number of years the policy or contract has been in existence. The relief is the difference between the tax otherwise chargeable on the full gain and the tax that would be charged if the full gain were taxed at the rate of tax chargeable on the fraction.

665.     How to determine the fraction, and how the tax chargeable on the fraction is calculated, depends on whether the individual is taxable under this Chapter in the tax year on a gain from one chargeable event (clause 536) or on gains from more than one event (clause 537).

666.     Subsection (3) sets out how to calculate the tax on the gain(s) before any relief under this clause has been given. The gain is treated as the "top slice" of the individual's total income.

667.     Subsection (5) ignores certain items of income in working out an individual's "total income" for these purposes. Section 835 of ICTA defines "total income", in relation to any person, as "the total income of that person from all sources estimated in accordance with the provisions of the Income Tax Acts".

Clause 536: Top slicing relieved liability: one chargeable event

668.     This clause is based on sections 550 and 553 of ICTA.

669.     The method employed in subsection (1) takes three steps. The first step determines the fraction of the gain (called the "annual equivalent"). The second calculates the net tax charge that would apply to that fraction. The third step works out the tax on the whole gain (called the "relieved liability") by multiplying the tax calculated under step 2 by the factor ("N" - see step 1) which was used to find the fraction.

670.     "N" represents the number of complete years the policy or contract has run before the chargeable event.

671.     Subsections (2) to (8) contain rules which modify how "N" is worked out. For example, where the gain is from a "calculation event", that is, a part surrender or assignment that gives rise to a gain, subsection (2) substitutes the number of years since the latest "calculation event" which arose on that policy or contract. (But, where the policy is a "new policy" (see subsection (5)) in relation to a replaced policy, any calculation event which arose on the replaced policy is disregarded for the purposes of subsection (2), even though the life of the "new policy" is, under subsection (4), dated from the commencement of the earlier replaced policy.)

Clause 537: Top slicing relieved liability: two or more chargeable events

672.     This clause is based on section 550 of ICTA. It employs the same method approach as clause 536, and the same rules modifying the calculation of the factor ("N") by which each gain is to be divided for the purposes of the calculation.

673.     However, the actual method employed differs in two respects. First, the fractions (the "annual equivalent") of each gain are totalled, so that the tax calculation under step 2 is made in respect of the totalled amount.

674.     Second, the relieved liability is found by multiplying the net tax on the total annual equivalents by the aggregated gains and dividing the result by the total annual equivalents. (Roughly speaking, this gives a result based on a weighted average of "N".) This method statement expresses explicitly the calculation described in section 550(6) of ICTA for such cases.

675.     The product of this calculation is compared with the unrelieved liability on the full gains (as calculated under clause 535(3)) to work out how much top slicing relief is available.

676.     For example, if an individual is chargeable on gains totalling £31,000 under this Chapter (say, gains of £6000 from one policy where "N" is four years and gains of £25,000 from another policy where "N" is ten years), and the net tax chargeable on those gains before relief (the "unrelieved liability") would be, say, £2400:

  • the "total annual equivalent" is £4000 (£1500 from the first policy plus £2500 from the second);

  • the "total relieved liability" on the total annual equivalent is, say, £200;

  • the relieved liability is £1550 (the total relieved liability £200 multiplied by the total gains £31,000, divided by the total annual equivalent £4000);

  • top-slicing relief is £850 (unrelieved liability £2400, less relieved liability £1550).

Clause 538: Recovery of tax from trustees

677.     This clause provides a right of recovery for an individual who, although the rights in question under the policy or contract are held by non-charitable trustees, is liable to tax on a gain or gains under this Chapter because clause 465(1)(b) applies. It is based on section 551 of ICTA.

678.     Subsection (1)(c) defines the tax that may be recovered from the trustees. Broadly, it is the extra tax paid on the gain or gains after any top slicing relief. Where top slicing relief is available and there is more than one chargeable event in the year, with at least one gain giving liability by virtue of clause 465(1)(b), subsection (4) provides that the relief is to be apportioned between the gains charged in working out the extra tax.

679.     Subsection (3) sets a cap on the amount can be recovered from trustees, by reference to what they have derived from the relevant chargeable event.

680.     Subsections (5) and (6) allow the individual to require the Inland Revenue (rather than the Board of Inland Revenue) to certify an amount recoverable from the trustees. See Change 149 in Annex 1.

Clause 539: Relief for deficiencies

681.     Together with clauses 540 and 541, this clause is based on section 549 of ICTA. These clauses provide a sort of "loss" relief where:

  • the overall gain on a policy or contract is less than the amounts that were charged as gains on chargeable events occurring in earlier policy years; and

  • the individual in question was the person liable to tax on those gains.

682.     The relief is only available to an individual. It only reduces tax charged at the higher rate or the "dividend upper rate" (the Schedule F upper rate in the source legislation).

683.     Under subsection (1), the relief is only given to an individual who would have been liable on a gain, had one arisen on the chargeable event in question. For this purpose, the requirement in clause 465(1), that an individual must be UK resident to be liable, is disregarded. The effect of this is that a non-UK resident individual, who is not liable under clause 465(1), but is chargeable to income tax on other income, is not denied the benefit of this relief.

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

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Prepared: 3 December 2004