Clause 674: Successive interests: holders of limited interests

1135.     This clause explains the position of a limited interest holder where successive interests in the residue of an estate are held by different people and the earlier, or if there are more than two, the earliest of the interests is a limited interest. It is based on sections 695 and 698 of ICTA.

1136.     The clause only applies where the later interests arise or are created on the cessation of the previous interest otherwise than by death.

1137.     Subsections (3) to (5) cover three sets of circumstances described as "cases" where the estate income in respect of successive limited interests is treated as arising. The cases are the equivalent for successive limited interests of the three cases for single limited interests in clause 654. But the clause recognises that there may be more than one limited interest in the chain of succession, so references are made to "one of the interests" and subsection (5) refers to "the last of the successive interests".

1138.     There is also an additional sub-paragraph in each case providing that a limited holder (as defined) is entitled to receive the payment. This reflects the fact that the person who receives the payment in these circumstances is not always the person in respect of whose interest the payment is made. For example, on disclaiming a life interest, a beneficiary may also disclaim any entitlement to income accrued in respect of that interest but not yet paid.

1139.     The clause does not make it explicit that a new chain of succession begins with the first limited interest (and a previous absolute interest is ignored) for the purposes of this provision. Nor does the clause make it explicit that two limited interests which are preceded by a limited interest which ceased on the death of the beneficiary are covered by the clause. These conclusions are implicit in the clause.

Clause 675: Basic amount of estate income: successive limited interests

1140.     This clause explains how to calculate the net amount of estate income for successive limited interests. It is based on sections 695 and 698 of ICTA.

1141.     The clause is the equivalent provision to clause 661 for limited interests that are not successive. Essentially, the basic amount of estate income is all the sums referred to in clause 674 falling within a particular tax year added together. It is impossible for there to be sums within both clause 674(4)(c) and (5)(c) in the same tax year.

Clause 676: Apportionments

1142.     This clause applies where successive interests apply to only part of the residue. In other words, the residuary estate is divided up and one or more of the successive interests provisions apply to a part or parts of that estate. It also applies where one of the interests covers the whole estate and the other interest covers part of it.

1143.     In such circumstances, it is possible that a subsequent interest does not cover exactly the same part of the residuary estate as the interest which preceded it. For example, a limited interest holder may give up half his or her interest, thus accelerating the interest of the absolute interest holder. Only half the share of the residuary income and half the net amounts of the limited interest holder would be needed for the calculation of whether the absolute interest holder has an assumed income entitlement in accordance with clause 672(2). The clause provides for just and reasonable apportionments to be made in these circumstances.

1144.     The clause is new. See Change 110 in Annex 1.

Clause 677: Relief where UK income tax borne by foreign estate: absolute interests

1145.     This clause provides for relief if income, which has borne UK tax, arises to a person with an absolute interest in the residue of a foreign estate. It is based on section 696 of ICTA. The relief has been expressed as a formula to make it easier to compute.

1146.     Subsection (2) contains the formula for calculating the relief where a claim is made. The labels in section 696(7)(a) and (b) of ICTA - "the deemed income" and "the aggregate income" respectively - were added as explanatory aids in the course of the 1988 consolidation. These labels are not retained.

Clause 678: Relief where UK income tax borne by foreign estate: limited and discretionary interests

1147.     This clause provides for relief if income, which has borne UK tax, arises to a person with a limited or discretionary interest in the residue of a foreign estate. The clause is based on sections 695 and 698 of ICTA. The relief has been expressed as a formula to make it easier to compute.

1148.     Subsection (2) provides for a reduction to be made from the tax charged on the person following a claim for relief. The tax is to be reduced by an amount equal to the appropriate fraction of that tax. The fraction here (based on section 695(5) of ICTA) is slightly different to the fraction used for absolute interests (based on section 696(7) of ICTA). The labels in section 695(5)(a) and (b) of ICTA - "the deemed income" and "the aggregate income" respectively - were added as explanatory aids in the course of the 1988 consolidation. These labels are not retained.

1149.     Section 695(6) of ICTA is not rewritten. The meaning of this provision, which was introduced when surtax was still charged, is now obscure and it difficult to see how it could operate in the context of self-assessment. See Change 111 in Annex 1.

Clause 679: Income from which basic amounts are treated as paid

1150.     This clause sets out the rules for determining from which part of the aggregate income of the estate a basic amount is treated as paid. It is based on sections 699A and 701 of ICTA.

1151.     Personal representatives may receive such income from a number of sources. And different rates of tax apply to different types of income. Some of the income is taxed in the hands of the personal representatives at "the applicable rate" (the basic rate, the lower rate or the dividend ordinary rate; see clause 680).

1152.     The basic amounts of estate income do not always correlate precisely with the income received by the personal representatives. It is therefore necessary to attribute payments out of the residuary estate in the form of basic amounts to particular types of income received by the personal representatives.

1153.     Subsections (4) to (6) deal with situations where some of the aggregate income of the estate is income treated under clause 680 as bearing tax. In such circumstances, a third assumption is introduced. That third assumption is to be applied before the two assumptions referred to in subsections (2) and (3).

Clause 680: Income treated as bearing income tax

1154.     This clause deals with income which is treated as bearing income tax. It is based on section 699A of ICTA.

1155.     For certain types of income (for example, stock dividend income) the amounts treated as received by individuals are gross amounts on which they are treated as having paid tax at the dividend ordinary rate (the Schedule F ordinary rate in the source legislation) or the lower rate (as appropriate). They may then be chargeable to tax at the dividend upper rate or the higher rate on that income. Where such income forms part of the aggregate income of the estate (as a result of clause 664(2)), this clause treats the income as having borne tax at either the dividend ordinary rate or the lower rate (as appropriate) for certain provisions within the Chapter.

1156.     Subsection (1) sets out the provisions within the Chapter affected by the clause. The provisions in question all affect the aggregate income of the estate (see clause 664).

1157.     Subsection (5) provides that no repayment shall be made of any income tax which is treated as having been borne under clause 656(3) or clause 657(4) so far as the basic amount comes from sums within this clause.

1158.     Section 699A(1)(b) of ICTA is not rewritten in this Bill. This provision provides that the sums to which section 699A(1)(a) of ICTA applies must be sums in respect of which the personal representatives are not directly assessable to UK income tax. Of the income referred to in section 699A(1)(a) of ICTA to which section 699A(1)(b) of ICTA applies, none appears to be directly assessable. So section 699A(1)(b) of ICTA serves no useful purpose.

1159.     Section 699A(6) of ICTA is not rewritten in this Bill. It deals with deduction of tax at source and will be considered with the rewrite of sections 348 and 349 of ICTA. The purpose it achieves is served by the consequential amendment to section 348 of ICTA in the new subsection (4)(e).

Clause 681: Transfers of assets etc. treated as payments

1160.     This clause is concerned with the appropriation of assets by personal representatives to themselves, any other transfer of assets and the set off or release of a debt. The clause is based on section 701 of ICTA.

1161.     Subsections (1) and (2) provide that the relevant events are treated as payments when they occur.

1162.     Subsections (3) and (4) provide that where the relevant events have not happened by the end of the administration period, amounts equal to the value of the assets or debt are treated as payable.

Clause 682: Assessments, adjustments and claims after the administration period

1163.     This clause deals with adjustments after the end of the administration period. It is based on section 700 of ICTA.

1164.     Subsections (1) and (3) deals with adjustments where the person previously appeared to be chargeable to either a greater or lesser amount.

1165.     Subsections (2) and (4) make provision for all necessary adjustments and repayments to be made (and where a person has been allowed too much relief, for tax to be charged). They also make provision for the person to be assessed and taxed (and where, for example, the beneficiary is a charity, for relief or additional relief to be allowed).

Chapter 7: Annual payments not otherwise charged

Overview

1166.     The Chapter rewrites the part of section 18(3) Schedule D Case III (a) of ICTA which deals with annual payments and the parts of Schedule D Cases IV and V which deal with foreign annual payments.

1167.     Under section 18(3) of ICTA there are no individual charges on income from different types of source within the Schedule D Case IV or V charge. The system of identifying and classifying income by Schedule and Case is being replaced by individual charges on types of income, which previously would have fallen under a general Schedular/Case charge. In the context of income which would have previously been charged under Case IV or V, as appropriate, the charge is being fully integrated with the equivalent income arising from a UK source.

1168.     This Chapter sets out the charge to income tax on any annual payments that are not charged to tax by any other provision of the Bill or any other legislation. Annuity payments made under purchased life annuities and distributions from unauthorised unit trusts (which in the source legislation are treated as annual payments) are generally regarded as investment income. So the charge to tax for this income is in Part 4 of the Bill. Royalties which are annual payments are generally regarded as income from intellectual property and are therefore taxed alongside other intellectual property income under Chapter 2 of Part 5 of the Bill. Annual payments derived from telecommunication rights are also taxed under a separate Chapter, Chapter 4 of Part 5 of this Bill. So, as the annual payments charge in Chapter 7 of Part 5 of this Bill takes effect only if an amount is not otherwise charged to income tax, there is no overlap between the charge under this Chapter and the ex-Case III charges elsewhere in this Bill.

1169.     The charge to tax is in the penultimate Chapter of Part 5 of the Bill to emphasise that it is a residual charge.

1170.     The exemptions from the charge to income tax on annual payments are in Part 6 of the Bill.

1171.     The phrase "annual payment" is retained but not defined. The phrase is not defined in the source legislation. Instead it derives its meaning from an extensive body of case law. That case law illustrates that the phrase has a meaning for tax purposes far different from its natural one. Replacing that phrase risks breaking the link to case law without making the law any clearer or easier to understand. Because of the volume and complexity of the case law, defining "annual payment" comprehensively in the Bill is impracticable and also risks changing the law.

1172.     But it is possible to derive from the case law the main characteristics of an annual payment.

1173.     For example, Jenkins L.J., in Commissioners of Inland Revenue v Whitworth Park Coal Company (1959), 38 TC 531 HL (at 548 to 550) regarded the following propositions as established:

(i)     To come within the Rule as an "other annual payment" the payment in question must be ejusdem generis with the specific instances given in the shape of interest of money and annuities (Hill v Gregory 6 TC 39; Earl Howe v Commissioners of Inland Revenue 7 TC 289)..;

(ii)     The payment in question must fall to be made under some binding legal obligation as distinct from a being a mere voluntary payment (Smith v Smith 1923)..;

(iii)     The fact that the obligation to pay is imposed by an Order of the Court and does not arise by virtue of a contract does not exclude the payment from Rule 1(a) of Case III (Smith v Smith 1923; CIR v Corporation of London (as Conservators of Epping Forest) 34 TC 293) ..;

(iv)     The payment in question must possess the essential quality of recurrence implied by the description "annual" (Smith v Smith 1923) ..;

(v)     The payment in question must be in the nature of a "pure income" profit in the hands of the recipient (Earl Howe v CIR 7 TC 289).

1174.     The value of the first proposition is not without doubt. Not only has Parliament changed the genus from that considered in Hill v Gregory and Earl Howe, but the Court of Appeal in R - v - Special Commissioners of Income Tax ex parte Shaftesbury Homes and Arethusa Training Ship (1922), 8 TC 367 CA, in construing "any yearly interest or other annual payment" held that the expression "other annual payment" could not be construed eiusdem generis with the expression "any yearly interest".

Clause 683: Charge to tax on annual payments not otherwise charged

1175.     This clause is based on section 18(1) and (3) (Schedule D Case III (a) and Cases IV and V) of ICTA. Subsection (1) charges residual annual payments to tax.

1176.     The charge to tax in the source legislation is in respect of "any annuity or other annual payment". The reference to "any annuity or other" is omitted because most annuities are not charged to tax under Chapter 7 of Part 5 of the Bill but under Part 4 of this Bill or ITEPA. Including a reference to annuities might therefore be misleading.

1177.     Likewise the examples of annual payments in Schedule D Case III (a) are omitted on the basis that including these risks misleading the reader either by excluding a right which may give rise to an annual payment or by including rights which do not.

1178.     The words "whether such payment is payable within or out of the United Kingdom" in Schedule D Case III (a) are also omitted. See the commentary on clause 370.

1179.     The charge to tax in the source legislation excludes "any payment chargeable under Schedule A". It is not necessary to rewrite this as the priority rules (see clause 575 (2)) ensure that property income is taxed under Part 3 and not under any other Part.

1180.     Subsection (2) ensures that any exemption from other charges to income tax is not reversed by the charge under this Chapter. It protects an exemption, whether provided by Part 6 or other legislation.

1181.     Subsection (3) rewrites "or whether the same is received and payable half-yearly or at any shorter or more distant periods".

Clause 684: Income charged

1182.     This clause sets out the amount charged to tax, which is the full amount of the annual payments (subsection (1)). It is based on sections 64 and 65(1) of ICTA.

1183.     The words "without any deduction" in section 64 of ICTA are omitted. It is unnecessary to reproduce this phrase because one of the defining characteristics of an annual payment is that the recipient may make no deductions for expenses from it. See also the commentary on clause 370.

1184.     Subsection (2) makes subsection (1) subject to the rules in Part 8 of this Bill. Part 8 sets out the special rules which apply to foreign income including allowable deductions from foreign income and the remittance basis (see further the commentary on Part 8).

1185.     Subsection (3) signposts the tax provision in ICTA which deals with the position of a person who receives income from a discretionary trust.

Clause 685: Person liable

1186.     This clause states who is liable for any tax charged and is based on section 59(1) of ICTA. The phrase "receiving or entitled to" is retained because it is generally understood and has been widely interpreted by the courts. See further the commentary on clause 371.

Clause 686: Payments received after deduction of tax

1187.     Subsection (1) confirms that if income tax has been deducted by the payer of the annual payment, the recipient is treated as having paid that income tax. It is based on sections 348(1) and 349(1) of ICTA. The gap currently filled by case law (see Allchin v Corporation of South Shields (1943), 25 TC 445 HL, particularly Viscount Simon LC at 461, Stokes v Bennett, (1953) 34 TC 337 HC, and Grosvenor Place Estates Ltd v Roberts (1960), 39 TC 433 CA) has been expressly rewritten. See further the commentary on clause 426.

Chapter 8: Income not otherwise charged

Overview

1188.     This Chapter charges to tax any income that is not charged by any other income tax provision, whether elsewhere in this Bill or in any other part of the Tax Acts, including ITEPA. It is based on section 18 of ICTA.

1189.     Schedule D is the residual Schedule into which income falls for income tax purposes if neither ITEPA nor another Schedule of ICTA applies to it. Section 18(1)(a) of ICTA charges "annual profits or gains arising or accruing.. from any kind of property whatever..". Section 18(1)(b) of ICTA charges "..other annual profits or gains not charged under Schedule A or under ITEPA 2003 as employment income, pension income or social security income, and not specially exempted from tax". Schedule F (rewritten in Chapter 3 of Part 4 of this Bill) has sole charging rights over the amounts within its scope. Tax is charged under Schedule D Case VI "in respect of annual profits or gains not falling under any other Case of Schedule D and not charged by virtue of Schedule A or by virtue of ITEPA 2003 as employment income, pension income or social security income".

1190.     Case VI is itself the residual Case under Schedule D. Schedule D Case V performs an identical function for "relevant foreign income" (see the definition in clause 830). The scope of Case V is "tax in respect of income arising from possessions out of the United Kingdom not being employment income, pension income or social security income on which tax is charged under ITEPA 2003". Case law has established the comprehensive scope of Case V in relation to "income from possessions out of the United Kingdom" (see the commentary on the overview to Part 8 of this Bill). So far as any amount is "income from possessions out of the United Kingdom", Case V is the "last resort" charging provision, not Case VI. And a corollary of that rule is that income charged by Case VI (other than amounts which are directed to be taxed under Case VI) can only derive from a source in the United Kingdom.

1191.     So far as is practicable, income charged by the source legislation under Schedule D Cases IV to VI is the subject of separate charges in this Bill. See, for example:

• Chapter 4 of Part 4 of this Bill, taken from Case V, which deals with dividends from non-UK resident companies;

• Chapter 3 of Part 5 of this Bill, taken from Cases V and VI, which deals with films and sound recordings (non-trade businesses); and

• Chapter 4 of Part 5 of this Bill, taken from Case VI, which deals with certain telecommunication rights (non-trading income).

1192.     This Chapter brings together the "sweep up" functions of Cases IV to VI. And it contains the charge to tax on two types of income where, in most cases, income will be wholly covered by relief. See clause 688(2)(a) and (b).

1193.     The charge under this Chapter is restricted to amounts that are "income" on first principles. That is, they are "annual profits or gains" under section 18(1) of ICTA, as that phrase has been interpreted by case law, and are not profits or gains of a capital nature (although some amounts of that nature have been treated as income charged to income tax, whether under a Case of Schedule D or otherwise). This is indicated by the use in clause 687(1) of the words "from any source" and by the disapplication of the definition of "income" in clause 878(1) by clause 687(4). (For the significance of the reference to "any source", see the commentary on the overview to Part 8 of this Bill on recent judicial remarks on "source".)

1194.     Although some charges to income tax, whether in ICTA or elsewhere in the Tax Acts, are not rewritten in this Bill or ITEPA, none of them overlaps with the charge under this Chapter. Nor is there any overlap with any other charges which themselves are limited to income not otherwise chargeable.

1195.     Under the source legislation, Case VI losses may be set against Case VI profits or gains (see section 392 of ICTA). Schedule 1 to this Bill amends that section so that, in conjunction with section 836B to ICTA (inserted by that Schedule), where a loss arises in circumstances that, had there been income rather than a loss (other than relevant foreign income) the income would have been charged under this Chapter, the same loss relief applies. The only equivalent loss relief for relevant foreign income is under section 391 of ICTA. But this relief is restricted to losses from a trade, profession or vocation carried on wholly abroad. Any income from such a source would be charged under Part 2 of this Bill. Section 391 of ICTA does not, therefore, apply to losses from a source where any income would be charged by this Chapter.

Clause 687: Charge to tax on income not otherwise charged

1196.     This clause is based on section 18 of ICTA. Schedule D Cases IV and V charge tax in respect of income, whether from securities or possessions out of the United Kingdom. Schedule D Case VI charges tax in respect of annual profits or gains. The scope of all three cases is derived from section 18(1) of ICTA, which refers to "annual profits or gains". Case law does not indicate a difference, in the context of section 18 of ICTA, in the meaning of "annual profits and gains" and "income". The choice of term appears to be dictated (although not consistently) by the degree to which a calculation of profit or loss is relevant to the calculation of the income charged.

1197.     The clause uses income rather than (annual) profits or gains. There is nothing known which is "income" within the usual meaning of the term and therefore caught by this clause but which would not be caught under Schedule D Cases V or VI.

1198.     Subsection (2) ensures that clause 683 (charge to tax on annual payments not otherwise charged) has the exclusive right to charge any annual payments not falling within any other charge.

1199.     Subsection (3) protects an exemption, whether provided by Part 6 of this Bill or other legislation.

1200.     Subsection (5) lists some exemptions which apply particularly to this charge. Other exemptions may (exceptionally) apply: for example, see clause 771 (relevant foreign income of consular officers and employees).

Clause 688: Income charged

1201.     This clause is based on sections 65, 68 and 69 of ICTA. The rules in sections 65(1) and 68(1) of ICTA, for income chargeable under Schedule D Cases IV and V, and under section 69 of ICTA, for income chargeable under Schedule D Case VI, are broadly similar. But there is a difference in terms used (income in sections 65 and 68 of ICTA, profits or gains in section 69 of ICTA). For the reasons set out in the commentary on the preceding clause, that difference has no significance here.

1202.     As regards any income within this charge which is relevant foreign income (defined in clause 830), Part 8 of this Bill applies. That Part rewrites the calculation rules in sections 65 and 68 of ICTA, for income charged under Schedule D Cases IV and V, setting out all the material differences between those rules and those in section 69 of ICTA, for income charged under Schedule D Case VI. Chapter 4 of Part 8 of this Bill contains rules that apply to income arising outside the United Kingdom, whether or not it is relevant foreign income.

1203.     See also Part 12 of Schedule 2 to this Bill. The paragraph "general deduction rules" provides that such case law guidance as there is on the calculation of income under this and other charges, as regards deductions allowed and not allowed, continues to apply. In respect of income that was formerly within Case VI, this ensures that the guidance in, for example, Curtis Brown Ltd v Jarvis (1929), 14 TC 744 HC remains applicable. (The effect of that guidance is spelt out in the clauses mentioned in that paragraph.)

1204.     See also Chapter 2 of Part 10 of this Bill for further rules that affect the calculation of income under this clause.