Clause 689: Person liable

1205.     This clause is based on section 59 of ICTA.

Part 6: Exempt income

Overview

1206.     This Part groups all of the clauses which provide exemption for income otherwise charged to income tax by this Bill. A signpost in each charging clause points the user to the main exemptions to that particular charge contained in this Part.

1207.     For the most part each Chapter in this Part relates to a particular type of income but there are also Chapters that deal with exemptions relevant to certain types of annual payment and also other miscellaneous income.

1208.     The exemptions, where relevant, apply to both United Kingdom and foreign income unless one of these kinds of income is expressly excluded in the clause.

1209.     The wording of the exemption clauses follows the "no liability approach" adopted in ITEPA.

Chapter 1: Introduction

Clause 690: Overview of Part 6

1210.     This clause lists the Chapters in this Part. These provide for exemption from income tax for:

• National savings income (Chapter 2);

• Income from individual investment plans (Chapter 3);

• SAYE interest (Chapter 4);

• Venture capital trust dividends (Chapter 5);

• Income from FOTRA securities (Chapter 6);

• Purchased life annuity payments (Chapter 7);

• Other annual payments (Chapter 8); and

• Other income (Chapter 9).

1211.     Subsection (3) explains the purpose of Chapter 10 (general). This Chapter provides that any exemption in this Part, unless there is specific provision to the contrary, is disregarded for all income tax purposes.

1212.     Subsection (4) indicates that there are exemptions in other Acts relating to particular categories of person which could be relevant to the charges in this Bill. For example see section 505 of ICTA which provides a general exemption for charities.

1213.     Subsection (5) explains that the exemptions in this Bill may apply, where relevant, to charges outside this Bill.

Chapter 2: National savings income

Overview

1214.     This Chapter deals with the exemptions from income tax relating to National Savings Bank ordinary account interest and income from savings certificates (including Ulster Savings Certificates).

Clause 691: National Savings Bank ordinary account interest

1215.     This clause is based on section 325 of ICTA, which exempts from income tax the first £70 of interest on National Savings Bank ordinary account deposits arising in a tax year. The exemption, which is not available for interest on National Savings Bank investment account deposits, applies only to interest of individuals. Although the interest is exempt from income tax, certain returns of information may need to be made in respect of it (for example, information returns by the National Savings Bank under section 17 of TMA - see clause 783(2)).

1216.     It has not been possible to open a National Savings Bank ordinary account since 28 January 2004. And since 31 July 2004, existing ordinary account customers will not be able to transact on their accounts, unless it is to close the account or transfer into an Easy Access savings account. Even though the ordinary account has closed, any money which is left dormant in these accounts will continue to earn interest. The first £70 of interest for each tax year will still be tax free and customers will be able to come forward at any time to claim their money. So the tax exemption contained in this clause will be needed for the foreseeable future.

1217.     Two minor changes have been made to the wording of section 325 of ICTA. These are:

• to remove the reference to "total income" (which dates back to the days of surtax) as it is no longer relevant to this particular section; and

• to remove the reference to investment accounts and make it clearer that the exemption applies only to ordinary account interest.

1218.     Subsection (2) makes it clear that a charge to income tax does apply where the interest exceeds £70 in a tax year. But the charge is only on the excess of the interest over £70 in the tax year.

Clause 692: Income from savings certificates

1219.     This clause provides an exemption for income from savings certificates, provided that the holding of savings certificates is within specified limits. Income from any certificates purchased or held in excess of these limits is chargeable to tax. The clause is based on section 46 of ICTA (excluding section 46(2) of ICTA which relates to Tax Reserve Certificates and is dealt with in clause 750).

1220.     Most income from savings certificates would otherwise be taxable under the charge to tax on interest. However, income from certain savings certificates falls within the charge on profits from deeply discounted securities. This exemption therefore applies to income chargeable under both Chapters 2 and 8 of Part 4 of this Bill.

1221.     The detailed rules governing these certificates, including the maximum holding limits, are in regulations. The source legislation refers to the limits in terms of purchase by, or on behalf of, an individual. This could be confusing for situations such as joint ownership or inheritance, where special regulations apply. Also, the regulations are written in terms of a holding limit, but in practice this translates into a prohibition on purchasing in some situations.

1222.     Subsection (2) avoids this confusion by using "acquisition" rather than purchase and by referring to the regulations as limiting a person's holding, in line with the way the regulations are written.

1223.     Although section 46 of ICTA was simply written in terms of certificates, it is possible to purchase multiple certificates. The regulations say that a multiple certificate is to be treated as a number of unit certificates for the purposes of determining whether the holding limit has been exceeded. On a strict reading of section 46 of ICTA none of the income from a multiple certificate which is partially outside the permitted limit would be exempt. The clause introduces the words "so far as" in subsection (2) to clarify that the exemption is available for the income from the permitted part of a multiple certificate. In practice section 46 of ICTA was applied in this way. See Change 112 in Annex 1.

1224.     Subsection (3) defines savings certificates. It is not possible to define savings certificates by reference to their characteristics; indeed, some savings certificates are not even called savings certificates. The only way of providing a completely accurate definition is by reference to the provisions under which the certificates are issued.

1225.     Subsection (4) excludes Ulster Savings Certificates from the general definition of savings certificates, and then signposts the special rules for such certificates in clause 693. Ulster Savings Certificates have been dealt with in a separate clause, so that holders of other savings certificates do not have to work through material which is not relevant for their type of certificate.

Clause 693: Income from Ulster Savings Certificates

1226.     This clause provides an exemption for income from Ulster Savings Certificates, for holdings within specified limits. Income from any certificates purchased or held in excess of these limits is chargeable to tax. The clause is based on section 46 of ICTA, which also deals with savings certificates generally (see clause 692).

1227.     The basic provisions for Ulster Savings Certificates are the same as those for other types of savings certificate, but there are some additional rules. Although Ulster Savings Certificates have not been issued since March 1997, there are still holdings which have not been redeemed. Consequently it is necessary to rewrite this provision to ensure that interest continuing to be paid in respect of these holdings is exempt from income tax.

1228.     Subsections (2) to (4) set out the residence conditions, one of which has to be satisfied in order for the income to qualify for exemption. Subsection (4) enacts ESC A34, which extends the exemption to a repayment made after the death of a holder who had been resident and ordinarily resident at the time the certificates were purchased. See Change 113 in Annex 1.

1229.     Subsection (5) uses "acquisition" rather than purchase and refers to a person's holding, in line with the way the regulations are written. In the case of Ulster Savings Certificates, the regulations which limit a person's holding are made by the Department of Finance and Personnel in Northern Ireland, rather than by the Treasury.

1230.     Although section 46 of ICTA was simply written in terms of certificates, it is possible to purchase multiple certificates. The regulations say that a multiple certificate is to be treated as a number of unit certificates for the purposes of determining whether the holding limit has been exceeded. On a strict reading of section 46 of ICTA none of the income from a multiple certificate which is partially outside the permitted limit would be exempt. The clause introduces the words "so far as" in subsection (5) to clarify that the exemption is available for the income from the permitted part of a multiple certificate. In practice section 46 of ICTA was applied in this way. See Change 112 in Annex 1.

1231.     Subsection (6) does not specify that the claim for exemption is to be made to the Board. Section 46(5) of ICTA requires such a claim to be made to the Board but it is not considered necessary for a claim to be made at this level. Clause 878(4) draws attention to the rules in TMA, which apply for the purposes of this Bill. Those rules require claims to be made to "an officer of the Board". See Change 149 in Annex 1.

1232.     Subsection (7) is based on section 832(1) of ICTA, which provides some general definitions. As these certificates are not mentioned elsewhere in this Bill, it is more helpful to incorporate a definition in this clause rather than have a general definition elsewhere which applies to the whole Bill.

Chapter 3: Income from individual investment plans

Overview

1233.     This Chapter gives the powers for regulations on individual investment plans - better known as PEPs and ISAs - to exempt income from tax. The regulations made so far are Personal Equity Plan Regulations (SI 1989/469) and Individual Savings Account Regulations (SI 1998/1870).

Clause 694: Income from individual investment plans

1234.     This clause contains the general powers for the Treasury to make regulations providing for the income of individuals from certain types of investment plan to be exempt from income tax and defines the scope of the exemption. It is based on section 333 of ICTA.

Clause 695: Investment plans

1235.     This clause contains the powers under which regulations may be made to provide rules about the form of the investment plans in which investments are held and about the investments which may be held in them. It is based on section 333 of ICTA.

1236.     Subsections (3) and (4) provide for approval and registration by the Board of Inland Revenue respectively. References to "the Board of Inland Revenue" (rather than to the Inland Revenue) must remain as the power to make regulations is conferred on the Board under the Inland Revenue Regulation Act 1890 and not on the Inland Revenue or its officers.

Clause 696: Plan managers

1237.     This clause contains the powers under which regulations may be made to provide rules for the investments to be held by plan managers on behalf of investors. It is based on section 333 of ICTA.

Clause 697: Special requirements for certain foreign managers

1238.     This clause contains the powers under which regulations may be made to provide rules for foreign institutions to be plan managers if they fulfil certain requirements. It is based on section 333A of ICTA.

1239.     Subsection (2) defines "foreign institution". Subsection (2)(c) includes non-UK resident insurance companies within the definition. Non-resident insurance companies are now included here rather than in a rewrite of section 333B(4) of ICTA, which provides for regulations to be made about non-resident insurance companies appointing United Kingdom tax representatives. See Change 114 in Annex 1.

Clause 698: Requirements for discharge of foreign institution's duties

1240.     This clause contains the requirements which have to be fulfilled for a "foreign institution" in clause 697 to be a plan manager. It is based on section 333A of ICTA.

Clause 699: Non-entitlement to exemption

1241.     Under clause 694(3) regulations may specify "the description of individuals who may invest" in a plan. This clause contains the powers under which regulations may be made to provide rules for an investor in a plan ceasing to be entitled to the exemption from income tax. It is based on section 333 of ICTA.

Clause 700: Information

1242.     This clause contains the powers under which regulations may be made to provide rules for documents and information to be provided within specified time limits to the Inland Revenue by the investor or the plan manager. It is based on section 333(4) of ICTA.

Clause 701: General and supplementary powers

1243.     This clause contains some general powers under which regulations may be made to provide administrative rules. The regulations may specify how the exemption is to be claimed, either by the investor or by the plan manager on behalf of the investor. It is based on section 333 of ICTA.

Chapter 4: SAYE interest

Overview

1244.     This Chapter rewrites the exemption for interest arising under certain contractual savings schemes, commonly known as SAYE schemes. The clauses are based on section 326 of and Schedule 15A to ICTA and on Schedule 12 to FA 1995.

1245.     An eligible employee who is granted options under a SAYE option scheme must agree to enter into a linked savings arrangement operated either by the National Savings Bank or by an authorised financial institution. Where the Treasury are satisfied that the arrangement is a linked savings arrangement, and meets any appropriate conditions, they certify it. Such an arrangement is called a "certified SAYE savings arrangement".

1246.     For the meaning of "SAYE option scheme", see section 516 of and Schedule 3 to ITEPA.

1247.     Under a linked savings arrangement, the employee agrees to save a specific amount each month, which may be between £5 and £250. At the end of the contract period (three, five or seven years) the contributions made will be repaid to the employee together with a bonus (based on the length of the contract and the level of contributions made). The employee may then use the money to exercise his share options under the SAYE option scheme. If the employee does not complete the contract, the contributions made are repaid together with interest (where this is due). In both cases, providing the institution operating the linked savings arrangement is authorised (where necessary), and the scheme complies with any Treasury requirements regarding certification, the bonus and interest payments are exempt from income tax.

1248.     Exemption was also available for interest and bonuses paid under "ordinary" SAYE schemes, which are not share option linked, where the contract was entered into before 1 December 1994. But any contract entered into before that date will have run its course before 2005-06. The transitional provisions in paragraph 7(1) of Schedule 12 to FA 1995 have therefore not been rewritten in this Chapter.

1249.     The exemption from tax is set out in clause 702. The remainder of the Chapter defines terms and sets out the administrative requirements for linked savings arrangements and for providers of arrangements.

Clause 702: Interest under certified SAYE savings arrangements

1250.     This clause is based on section 326 of ICTA. It introduces the key term "certified SAYE savings arrangement". The definition of that term in clause 703 introduces both the various conditions to be met by the savings schemes (and the financial institutions who provide them) and the certification machinery.

1251.     Subsection (3) qualifies the exemption by reference to:

• the rules in clause 707 for authorisation of institutions providing arrangements; and

• a provision in FA 1988 in respect of building societies.

1252.     Schedule 12 to FA 1988 contains provisions which apply when the business of a building society is transferred to a company in accordance with the Building Societies Act 1986 (that is, when a building society turns itself into a bank). Paragraph 7 of Schedule 12 to FA 1988 ensures that any interest payable after the transfer continues to be eligible for exemption, notwithstanding the fact that the transfer means the savings arrangement ceases to be a certified SAYE savings arrangement.

1253.     Subsection (4) defines "interest" for the purposes of the Chapter. Although section 326(1) of ICTA refers to "any terminal bonus, or interest or other sum", in practice only bonuses and interest are payable under SAYE schemes.

1254.     It is not clear why the source legislation refers to "other sum". The only other sums involved are contributions returned to the employee. But these are deposits - capital - being returned to an investor and are not themselves taxable. The words "other sum" add nothing to the provision (indeed, they might cause confusion) and are not rewritten.

1255.     All bonuses are computed by reference to the level of contribution made by the employee and to the length of the savings contract. Despite the expression "terminal bonuses", a bonus is interest for tax purposes. A separate reference to the terminal bonus might put beyond doubt that the bonus is exempt from tax. But such a reference might also cast doubt on whether the bonus is in fact interest. That would in turn create uncertainty as to how the bonus would be taxed if the SAYE scheme should lose the status necessary for the income from it to qualify for the exemption in section 326 of ICTA. The clause therefore simply uses "interest" throughout as including "bonus".

1256.     The consequential amendments in Schedule 1 to this Bill of section 477A(4) of ICTA (building societies: regulations for deduction of tax) and of section 271(4) of TCGA (other miscellaneous exemptions), both of which refer to the source legislation for these clauses, follow suit.

Clause 703: Meaning of "certified SAYE savings arrangement"

1257.     This clause is based on section 326 of and Schedule 15A to ICTA. It introduces the term "linked savings arrangement", defined in subsection (2). The source legislation refers to "contractual savings schemes" but this is only one of a number of names by which these arrangements are known. As any arrangement entered into since 1994 must be linked to a SAYE option scheme, "linked savings arrangement" reflects the present position.

1258.     Subsection (2) introduces the various types of arrangement (set out in clause 704) and the required link between the savings arrangement and the SAYE option scheme.

1259.     The definitions in subsection (3) are based on terms used and definitions provided by Schedule 15A to ICTA.

Clause 704: Types of arrangements and providers

1260.     This clause sets out what types of arrangement may be linked savings arrangements. It provides definitions of each type of arrangement. These definitions are based on section 326 of and Schedule 15A to ICTA.

1261.     Subsection (1) indicates that linked saving arrangements are either a "national savings arrangement" (defined in subsection (2)), or an "institutional arrangement", that is, one provided by a financial institution (defined in subsections (3) to (6)). The main distinction between a national savings arrangement and an institutional arrangement is that the provider of an institutional arrangement must be authorised (see clause 707). The Treasury may also impose requirements on an institutional arrangement before they certify it under clause 705.

Clause 705: Certification of arrangements

1262.     This clause sets out the administrative provisions for the certification by the Treasury of linked savings arrangements. It also provides the powers for the Treasury to impose further requirements on an institutional arrangement. In practice, this means that arrangements must correspond to the Treasury model scheme for these arrangements. It is based on section 326 of and Schedule 15A to ICTA.

1263.     In the source legislation, the power to impose further requirements is in respect of requirements "for the purposes of" section 326 of ICTA. But Schedule 15A to ICTA has "effect for the purposes of section 326" (paragraph 1 of that Schedule), so that the section must be read with the Schedule. This Chapter incorporates both the section and the Schedule, so this clause applies the power in respect of requirements for the purposes of the Chapter.

Clause 706: Withdrawal and variation of certifications and connected requirements

1264.     This clause is based on Schedule 15A to ICTA.

Clause 707: Authorisation of providers

1265.     This clause is based on section 326 of and Schedule 15A to ICTA.

Clause 708: Withdrawal and variation of authorisations

1266.     This clause is based on Schedule 15A to ICTA.

Chapter 5: Venture capital trust dividends

Overview

1267.     This Chapter rewrites the provisions exempting from income tax dividends from Venture Capital Trusts ("VCTs"). The clauses are based on section 332A of and Schedule 15B to ICTA.

1268.     The VCT scheme is one of three venture capital schemes (the other two being the Enterprise Investment Scheme and the Corporate Venturing Scheme).

1269.     The VCT scheme is aimed at encouraging individuals to invest indirectly in unquoted trading companies. VCTs are companies listed on the London Stock Exchange and are a special type of investment trust approved for the purpose of the VCT scheme by the Inland Revenue.

1270.     The exemption from income tax on dividends is one of the benefits of investing in a VCT. Schedule 15B of ICTA sets out the tax relief available on the investment in a VCT and sections 151A and 151B of and Schedule 5C to TCGA give certain reliefs from capital gains tax.

Clause 709: Venture capital trust dividends

1271.     This clause is based on paragraphs 7 and 8 of Schedule 15B to ICTA and sets out the conditions that have to be met in order for a VCT dividend to be exempt from income tax.

1272.     Paragraph 7(3)(a) refers to " .. a dividend (including a capital dividend) ..". This is rewritten simply as "a dividend". Section 209(2) of ICTA, which sets out the meaning of "distribution", also refers to "any dividend paid by the company, including a capital dividend" (see section 209(2)(a) of ICTA). However, the charging provision (see section 20(1) paragraph 1 of ICTA) refers simply to "all dividends and other distributions .. which are not specifically excluded from income tax .. however they fall to be dealt with in the hands of the recipient". Likewise the rewritten charging provision charges to tax "dividends and other distributions .." (see clause 383). Given that the charging provision does not specifically refer to capital dividends and an investor is unlikely to know that he or she is receiving a capital dividend, the reference to capital dividends is omitted.

1273.     The conditions for exemption relate first to the dividend (subsection (2)), then to the investor (subsection (3)) and then to the circumstances surrounding the investment (subsections (4) to (7)).

1274.     The exemption applies only to dividends paid on ordinary shares acquired within the annual acquisition limit of £200,000 (see subsection (4)). The value applied is market value as defined in section 272 and 273 of TCGA (see subsection (8)).

1275.     The condition contained in subsection (6) is based on paragraph 7(3)(a)(ia) of Schedule 15B to ICTA which was inserted by FA 1999. The condition applies only to acquisitions made on or after 9 March 1999 (see subsection (1)(b)). Subsection (7) confirms that shares not acquired for genuine commercial reasons are not treated as using part of the annual acquisition limit whether those shares were acquired before or after 8 March 1999. Prior to the FA 1999 amendments, such shares were not "relevant acquisitions". Following the FA 1999 amendments, dividends paid on such shares cannot qualify for exemption and therefore the shares are disregarded for the purposes of determining whether the annual acquisition limit has been exceeded.