Averaging profits of farmers and creative artists

215.     This transitional provision relates to Change 60 in Annex 1. It preserves a taxpayer's right (if one exists under ICTA) to claim averaging for 2004-05 and 2005-06 even if one of those years is the year in which the taxpayer starts or ceases to carry on the trade, profession or vocation.

Adjustment on change of basis: paragraph 12 of Schedule 22 to FA 2002

216.     This transitional provision relates to Change 62 in Annex 1. It preserves the FA 2002 spreading arrangements if an election has been made under the FA 2002 rules.

Adjustment on change of basis: section 104 of ICTA

217.     Section 109 of ICTA provides a special relief for individuals born before 6 April 1917 who are chargeable to tax under section 104 of ICTA. The relief takes the form of a fractional reduction in the amount charged under section 104 of ICTA. This transitional provision replaces the relief with an exemption. So section 109 of ICTA is repealed without being rewritten. See Change 156 in Annex 1.

Part 4: Property income

Apportionment of profits or losses to tax years before tax year 2005-06

218.     Section 21(2) of ICTA, rewritten as clause 270 provides that income from a property business is taxed on the full amount of the profit arising in the tax year. If the taxpayer does not prepare accounts to 5 April it may be necessary to apportion accounts made up to a different date to calculate the amount arising in the tax year. Section 72 of ICTA, rewritten as clause 275, applies to the profits of a property business through section 21A(2) of ICTA and allows the profits of the period of account to be apportioned to tax years.

219.     Clause 883 provides that the Bill takes effect for income tax purposes for the tax year 2005-06. This paragraph provides that the profits of a period of account that straddles 6 April 2005 are calculated by reference to the rewritten legislation even though years earlier than 2005-06 will be affected. This Bill includes a number of minor changes in the law. Without this paragraph it would be necessary for taxpayers to take account of those changes only for 2005-06.

220.     If a taxpayer does not want the new law to apply to a transaction that occurred before 6 April 2005 he or she can elect for the old legislation to continue to apply.

Part 5: Savings and investment income: general

Open-ended investment companies: saving for powers to make provision corresponding to provisions applicable to unit trusts

221.     Section 152 enables regulations to be made for securing that the Tax Act and TCGA and some other enactments have effect in relation to open-ended investment companies, their holdings and assets and transactions relating to them in a way corresponding to that in which they have effect in relation to unit trusts. However, this Bill rewrites the effect of some of the regulations made under this power as free-standing provisions without reference to unit trusts. (See clauses 373 to 375 and clauses 386 to 388). So this saving is necessary to preserve the power in section 152 of FA 1995 so that regulations may continue to be made for achieving any purpose that could be achieved by such regulations before enactment of those clauses, because after their enactment they will not be provisions that relate to unit trusts.

Deeply discounted securities: deemed transfers of strips on 5th April

222.     Paragraph 14(4) of Schedule 13 to FA 1996 provides that a strip of a government security is deemed to be transferred on that day and reacquired the following day. This is rewritten in clause 445 as a disposal and reacquisition on the same day. See Change 87 in Annex 1. This change will not work as it should for the tax year beginning 6 April 2005, when this Bill first has effect, because while paragraph 14(4) of Schedule 13 to FA 1996 will deem a disposal on 5 April it will have been repealed on 6 April. There will therefore be no deemed reacquisition.

223.     This provision ensures that the strip will be deemed to have been reacquired on 6 April 2005.

Profits from deeply discounted securities: saving for charities' losses and Profits from deeply discounted securities: saving for pension trustees' losses

224.     These two provisions rewrite paragraph 7(1) and (3) of Schedule 13 to FA 1996. These sub-paragraphs deal with losses on deeply discounted securities incurred by charities and pension trustees where the securities have been held since 26 March 2003 and are listed on a recognised stock exchange. Because these provisions are likely to be of extremely limited application they have been relegated from Chapter 8 of Part 4 of this Bill (deeply discounted securities) of this Schedule.

Exclusion of deeply discounted securities from section 711 to 718 of ICTA (accrued income profits)

225.     Section 710(3) of ICTA lists securities which are excluded from the accrued income scheme in Chapter 2 of Part 17 of ICTA. Section 710(3)(f) of ICTA (securities which are relevant discounted securities within Schedule 13 to FA 1996) has been consequentially amended by Schedule 1 to this Bill to refer to deeply discounted securities within Chapter 8 of Part 4 of this Bill.

226.     Before FA 2003, paragraph 11 of Schedule 13 to FA 1996 was the only exclusion of relevant discounted securities from the accrued interest scheme. As part of the provisions for removing loss relief on relevant discounted securities, paragraph 5(2)(c) of Schedule 39 to FA 2003 repealed paragraph 11 of Schedule 13 to FA 1996 and added relevant discounted securities to the list of securities outside the accrued income scheme in section 710(3)(f) of ICTA.

227.     But paragraph 6(1)(b) of Schedule 39 to FA 2003 repeals paragraph 11 of Schedule 13 to FA 1996 only in relation to a loss on a relevant discounted security on or after 26 March 2003 and applies section 710(3)(f) of ICTA only in relation to losses on or after that date.

228.     Moreover paragraph 6(2)(b) of Schedule 13 to FA 1996 provides a saving for changes introduced by paragraphs 5(2) and (4) of that Schedule if the security is quoted on a recognised stock exchange and has been held continuously since before 27 March 2003. In those circumstances paragraph 7 of Schedule 13 to FA 1996 continues to apply.

229.     The complex position that emerges is:

• section 710(3)(f) of ICTA applies only where losses arise unless the loss arises on a quoted security held since before 27 March 2003; and

• paragraph 11 of Schedule 13 to FA 1996 continues to apply for all gains but also for losses arising on a quoted security held since before 27 March 2003.

230.     It serves no purpose to have one provision applying to gains and another to losses and the repeal of paragraph 11 of Schedule 13 to FA 1996 and insertion of section 710(3)(f) of ICTA suggest that this was not the intention.

231.     This paragraph therefore applies section 710(3)(f) of ICTA for all disposals after 6 April 2005.

Gains from contracts for life insurance etc: foreign policies of life insurance

232.     This paragraph preserves the status of certain foreign policies of life insurance as qualifying policies where the policy had that status prior to the amendment of section 553(2) and (7) of ICTA by section 55(8) of FA 1995. That amendment removed the status for policies which depended for it on satisfying the condition in paragraph 24(4) (rather than paragraph 24(3)) of Schedule 15 to ICTA. Some foreign policies were issued by insurers who were, at that time, subject to UK tax under section 445 of ICTA and such policies were only qualifying policies within the meaning of Schedule 15 to ICTA by virtue of paragraph 24(4) of that Schedule. This paragraph is based on section 55(8) of FA 1995.

233.     Where this paragraph applies, the provisions mentioned in clause 474(2) apply to the policy in question. But an individual or trustee chargeable on a gain arising in respect of such a policy will get the income tax allowance provided by clause 530 where condition B in clause 531 is met.

Gains from contracts for life insurance etc: exclusion of pension policies

234.     Chapter 9 of Part 4 of this Bill anticipates the amendment by FA 2004 of Part 14 of ICTA (pension schemes, social security benefits, life annuities etc.), so that it uses the descriptions which will be substituted from 6 April 2006. This paragraph preserves the original descriptions in the unamended source legislation for the tax year 2005-06.

Gains from contracts for life insurance etc: rights partially assigned

235.     FA 2001 introduced rules, inserted as section 546A of ICTA, to determine what assignments are regarded as taking place when certain assignments of part or a share of the rights under a policy or contract are assigned. The first paragraph ensures that any question of what is or is not an assignment of such a part or share, in relation to times before section 546A of ICTA applies, is determined without regard to clause 505 (which rewrites section 546A of ICTA). This paragraph is based on section 83 of FA 2001.

236.     FA 2001 also amended Chapter 2 of Part 13 of ICTA so that an assignment of rights under the policy or contract before 6 April 2001 which is not for money or money's worth is ignored. The second paragraph ensures that such assignments which occurred before that date continue to be valued as they were valued prior to the amendments of FA 2001 where the value of such an assignment is material to the operation of Chapter 9 of Part 4 of this Bill. This paragraph is based on section 83 of FA 2001.

Gains from contracts for life insurance etc: regulations providing for relief where foreign tax chargeable

237.     This paragraph preserves the original scope of the powers in section 56(3) of FA 1995 which are rewritten in clause 534. It is based on section 56(3) of FA 1995.

Gains from contracts for life insurance etc: pure protection group life policies

238.     FA 2003 amended the law in respect of group life policies to ensure that such policies did not give rise to gains chargeable under Chapter 2 of Part 13 of ICTA. Provision was made to disregard any event happening before 9 April 2003 as a chargeable event, if it happened in respect of a particular type of group life policy (a "pure protection group life policy"). This paragraph preserves that disregard in the event of it being necessary to consider, for the purposes of Chapter 9 of Part 4 of this Bill, whether any event happening before that date in relation to such a policy has been a chargeable event. This paragraph is based on paragraph 3 of Schedule 34 to FA 2003.

Gains from contracts for life insurance etc: assessment of trustees etc

239.     This paragraph preserves the commencement date for the FA 1998 amendments to Chapter 2 of Part 13 of ICTA (liability of trustees in respect of gains from life policies etc.), so that the FA 1989 rules on the assessment of trustees (as amended by Schedule 1 to this Bill) do not refer to gains from chargeable events before 6 April 1998. This paragraph is based on paragraph 7 of Schedule 14 to FA 1998.

Transactions in deposits

240.     The first paragraph is based on section 56(3) of ICTA. It preserves a commencement rule for the source legislation rewritten in Chapter 11 of Part 4 of this Bill should there be any extant pre-7 March 1973 certificates of deposit. See the commentary on that Chapter.

241.     The second paragraph is based on paragraph 6 of Schedule 8 to FA 1992. It preserves a commencement rule for the source legislation rewritten in Chapter 11 of Part 4 of this Bill should there be any extant pre-16 July 1992 uncertificated deposits.

Disposals of futures and options involving guaranteed returns: certain pre-6th February 1998 transactions

242.     This paragraph ensures that clause 564 (deemed disposal where futures run to delivery or options are exercised) will not apply where the transaction took place before 6 February 1998.

Disposals of futures and options involving guaranteed returns: rates of tax for pension trustees

243.     This paragraph modifies Condition C in clause 568 (special rule for certain income of trustees) for the tax year 2005-06. It rewrites paragraph 7(2)(c) of Schedule 5AA to ICTA as it stands before the amendments made by FA 2004, which only apply for the tax year 2006-07 onwards.

Part 6: Savings and investment income: insurance contracts and policies made before certain dates

Overview

244.     This Part of this Schedule applies for the purposes of Chapter 9 of Part 4 of this Bill.

245.     The paragraphs in this Part set out in chronological order the further rules that apply to policies issued in respect of insurances made or contracts made before certain dates. These rules largely reflect the commencement provisions applying to the source legislation as variously amended.

246.     Part 7 of this Schedule contains further rules that apply to personal portfolio bonds in respect of policies and contracts pre-dating 17 March 1998.

247.     Other transitional provisions are provided in Part 5 of this Schedule in respect of Chapter 9 of Part 4 of this Bill.

Pre-20th March 1968 policies and contracts excluded from Chapter 9 of Part 4

248.     This paragraph excludes certain policies and contracts from the scope of Chapter 9 of Part 4 of this Bill. It is based on section 539 of ICTA.

249.     Sub-paragraph (2) removes that exclusion where the policy or contract is varied after the relevant date in certain circumstances. This is a common feature of the chargeable event gains regime. It prevents the exploitation of policies and contracts which benefit from a particular rule in relation to a specific date, where the later variation could increase the value of that benefit to a degree not contemplated by the provision.

250.     Sub-paragraph (3) restricts the effect of sub-paragraph (2) where the variation was made by 31 December 1968 to comply with certain provisions for qualifying policies (as at that time).

Pre-27th March 1974 policies and contracts: disapplication of section 500(c)

251.     This paragraph reflects the commencement provisions in the source legislation for clauses 500(c) and 501, which treat certain loans as part surrenders of a policy or contract. It is based on section 548(1) of ICTA.

Pre-27th March 1974 contracts: disapplication of section 531(3)(c)

252.     This paragraph reflects the commencement provisions in the source legislation for the treatment of certain contracts for a life annuity. It is based on section 547(5A) of ICTA.

Pre-10th December 1974 contracts for a life annuity: disapplication of section 484(1)(d)

253.     This paragraph reflects the commencement provisions in the source legislation for the treatment of death as giving rise to a surrender of the rights under a contract for a life annuity. It is based on section 542(2) of ICTA.

Pre-14th March 1975 policies and contracts: calculation of gains under section 507

254.     This paragraph applies to policies and contracts which are more than 20 years old. Premiums paid on such policies 20 or more years ago will be 100% allowable in computations of gains, subject to the restriction this paragraph applies in respect of years beginning before 14 March 1975. It introduces, for the policies and contracts to which it applies, the concept of a "reference period", defined in sub-paragraph (6) as insurance years beginning after 13 March 1975. Where the paragraph applies, it affects the periodic calculation under clause 507. It is based on section 546(1) of ICTA.

255.     Sub-paragraph (3) limits the period within which certain assignments contribute amounts in the calculation under clause 507 of the "net total value" of rights assigned by reference to that reference period.

256.     Sub-paragraphs (4) and (5) amend the calculation to allow a portion of each premium paid before the reference period and during the reference period in the total of "net total allowable payments". The portion allowed cannot exceed 100% of a premium paid in a year falling wholly in the reference period. If the premium was paid in an insurance year beginning before the reference period, the allowable amount diminishes the earlier the premium was paid. For each such premium, one-twentieth is "lost" for each year beginning before the reference period, back to and including the year the premium was paid.

Pre-25th March 1982 replacement policies: disapplication of section 542

257.     This paragraph is based on paragraph 20(4) of Schedule 15 to ICTA. A replacement policy issued before 25 March 1982 is not treated as a single policy with the one it replaced, but as a freshly issued policy in, for example, the calculation of "N" in clause 536 (calculations for top slicing relief).

Certain pre-26th June 1982 policies and contracts excluded from Chapter 9 of Part 4

258.     Before FA 1983, gains on "second hand" life insurance policies and life annuity contracts (that is, where all the rights had previously been assigned for money or money's worth) were subject to capital gains tax rather than income tax. The gain was computed under capital gains tax rules.

259.     This paragraph preserves that treatment so long as none of the events set out in sub-paragraphs (3) to (5) occur after 23 August 1982. Should such an event occur, the policy or contract comes again within the scope of Chapter 9 of Part 4 of this Bill. The paragraph is based on sections 540, 542 and 544 of ICTA.

260.     Sub-paragraphs (5) to (9) provide that certain loans made by, or by arrangement with, the issuer of the policy or contract to, or at the direction of, an individual bring the assigned policy or contract back into the scope of Chapter 9 of Part 4 of this Bill. They ensure that the treatment of such loans corresponds with the rules (including exceptions) in clause 501.

261.     Sub-paragraph (6) ensures that the individual mentioned in sub-paragraph (5) is within the scope of that provision even where the rights under the policy or contract are held under a charitable trust that individual created (although a gain would not be attributed to that individual under clause 465 in such circumstances).

262.     Sub-paragraph (9) ensures that the loan bringing the policy back within the scope of Chapter 9 of Part 4 of this Bill is treated as a part surrender by virtue of clause 500.

Certain pre-18th November 1983 policies not foreign policies of life insurance

263.     This paragraph is based on section 553A of ICTA. The paragraph reflects the commencement rules for the source legislation.

264.     The exclusion from the scope of Chapter 9 of Part 4 of this Bill of a policy to which this paragraph applies is lost if it is varied in certain ways. See the commentary on the similar provision for "pre 20th March 1968 policies and contracts excluded from Chapter 9 of Part 4".

265.     See also the commentary for "certain pre-17th March 1998 policies not foreign policies of life insurance".

Certain pre-23rd February 1984 policies not foreign capital redemption policies

266.     This paragraph is based on section 553(10) of ICTA. That section defines a "new offshore capital redemption policy" (the equivalent term in the source legislation for a "foreign capital redemption policy"). This paragraph reflects the commencement rules for that source legislation. See the commentary for "certain pre-23rd March 1999 policies not foreign capital redemption policies".

Pre-14th March 1984 policies: disregard of amounts deducted and repaid after tax relief by deduction from premiums abolished

267.     Certain amounts were treated under section 72(9) of FA 1984 as additional premiums paid on 5 August 1984 only. This treatment arose exceptionally from the abolition of the right to deduct tax relief from premiums paid to the insurer. This paragraph ensures that such amounts are disregarded in computing gains for the purposes of certain calculations in Chapter 9 of Part 4 of this Bill. It is based on section 541(6) of ICTA.

Certain pre-20th March 1985 policies: application of section 529(1)

268.     This paragraph is based on section 553(5) of ICTA. It reflects the insertion by FA 1985 of an exception to the rules introduced by FA 1984. The FA 1984 rules provided for the reduction of gains where the policy holder was not UK resident during all or part of the policy period (see clause 528).

269.     That exception applies when the policy is held at the time of the chargeable event by one or more non-UK resident trustees.

270.     The paragraph reverses the exception made by clause 529 if the policy was held by such a trustee or trustees on 19 March 1985 and the policy was issued in respect of an insurance (for a policy of life insurance) or contract (for a capital redemption policy) made on or before that date.

271.     The paragraph repairs an omission in the source legislation which would exclude a capital redemption policy from the benefit of the paragraph. In the source legislation, the reduction under section 553(3) of ICTA is only made if, under section 553(5A)(a) of ICTA, the policy was issued in respect of an insurance made before 17 March 1998. The term used in that paragraph is only apt for a policy of life insurance, although section 553(5) of ICTA covers capital redemption policies too, and the opening words of section 553(5) of ICTA are apt for both since they just refer to "the policy". Instead of saying "issued in respect of an insurance made", section 553(5)(a) of ICTA should have also have referred to a capital redemption policy "issued in respect of a contract made". In practice, section 553(5) of ICTA is interpreted as if it referred also to the making of contracts for capital redemption policies.

Pre-14th March 1989 qualifying policies: application of section 485(2)(b) and (3)(b)

272.     This paragraph reflects the commencement rules for paragraph (b) in clause 485(2) and (3) which affects the incidence of chargeable events, in respect of a qualifying policy, where the rights under the policy are held as security for a debt owed by a company. This paragraph is based on section 540(5A) of ICTA.

273.     The modification of the incidence of chargeable events is removed if the policy is varied in certain ways. See the commentary on the similar provision for "pre-20th March 1968 policies and contracts excluded from Chapter 9 of Part 4". Sub-paragraphs (2) and (3) are based on section 539(9) of ICTA.

Pre-14th March 1989 policies and contracts: application of section 501

274.     This paragraph is based on section 548(3A) of ICTA. It limits the application of clause 501 (loans by insurers giving rise to part surrenders) where:

• the policy or contract dates from before 14 March 1989; and

• the rights under the policy or contract were held in circumstances that a company would be liable to tax under section 547(1)(b) of ICTA on a gain arising on that policy or contract.

275.     Sub-paragraphs (2) and (3) remove the limitation on the scope of clause 501 if the policy is varied in certain ways. See the commentary on the similar provision for "pre-20th March 1968 policies and contracts excluded from Chapter 9 of Part 4". These sub-paragraphs do not apply to a life annuity contract. They are based on section 539(9) of ICTA.

Contracts in accounting periods beginning before 1st January 1992: disapplication of sections 530 and 539(3)

276.     This paragraph modifies the application of a number of provisions in Chapter 9 of Part 4 of this Bill to certain life annuity contracts. The contracts affected are defined by reference to dates in 1974 (as regards the contract) and 1992 (as regards the insurer). Between those dates, the investment profits of the insurer in respect of such contracts did not bear UK tax. They are therefore treated similarly to foreign policies and contracts. The paragraph is based on sections 547 and 549 of ICTA.

277.     Sub-paragraphs (2) and (3) denies such contracts the income tax allowance etc provided by clause 530 unless either clause 532 or clause 534 applies. Certain other life annuity contracts are also denied that allowance (subject to the same exceptions) by clause 531.

278.     This sub-paragraph does not apply in the computation of top slicing relief. The effect of this is to give equal, rather than more favourable treatment under that relief, compared to that given to policies and contracts whose underlying investment profits have borne UK tax.

279.     Sub-paragraph (4), however, provides that the tax relief due under clause 539 for a corresponding deficiency may extend to rates other than the higher rate for such a contract. This recognises the fact that a gain on a calculation event in respect of such a contract will have been charged at the starting and lower rates as well as the higher rate (where applicable).

280.     Sub-paragraph (5) amplifies the source legislation by providing a definition of "accounting period". The term is used in Chapter 2 of Part 13 of ICTA (see section 547(5A)(b) of ICTA) but the meaning there has to be assumed, given that the terms of reference of the definition in section 834(1) of ICTA (which refers to section 12 of that Act) do not include that Chapter as it applies for income tax purposes.