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

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Certain pre-17th March 1998 policies: application of section 529(1)

281.     This paragraph deals with a similar circumstance to that for "certain pre-20th March 1985 policies: application of section 529(1)". It is based on section 553(5A) of ICTA.

282.     FA 1998 introduced an exception which limits the availability of the reduction of a gain for periods of non-UK residence on the part of the policy holder (see clause 528), where the policy of life assurance or capital redemption policy is held by a foreign institution (see the definition of that term in clause 468(5)).

283.     The paragraph reverses the exception made by clause 529 if the policy was held by a foreign institution on 16 March 1998 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.

284.     As for "certain pre-20th March 1985 policies: application of section 529(1)", this paragraph repairs an omission in the source legislation which would exclude a capital redemption policy from the benefit of the paragraph.

Certain Pre-17th March 1998 policies not foreign policies of life insurance

285.     This paragraph reflects the fact that the commencement rules for the source legislation relevant to the paragraph (a) and paragraph (b) elements of the definition in clause 476(3) of a "foreign policy of life insurance" use different dates. It is based on section 553A of ICTA.

286.     Sub-paragraph (1) effectively states the general rule that policies issued in respect of an insurance made before 17 March 1998 are not foreign policies of life insurance unless certain conditions are met. This ensures that policies falling within the paragraph (b) element of the definition do so only if they are issued in respect of an insurance made on or after that date.

287.     The sub-paragraph then identifies the conditions which disapply the basic rule. These are where policies are within the paragraph (a) element of the definition (subject to the commencement rule for "certain pre-18th November 1983 policies not foreign policies of life insurance").

288.     As was the case for "certain pre-18th November 1983 policies not foreign policies of life insurance", the paragraph is based on section 553A of ICTA.

289.     Sub-paragraphs (2) and (3) disapply the general rule in sub-paragraph (1) 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".

Pre-17th March 1998 policy or contract: UK resident trustees

290.     This paragraph reflects the commencement rules for the source legislation, which deals with the liability of UK resident trustees. It is based on paragraph 7 of Schedule 14 to FA 1998.

291.     In addition to the usual provision in sub-paragraph (3) defining policies and contracts, gains from which are not to be attributed to trustees, and the usual reservation in sub-paragraph (4) for policies and contracts subsequently varied, sub-paragraph (1) prescribes a date condition and a settlor condition.

Certain pre-23rd March 1999 policies not foreign capital redemption policies

292.     This paragraph reflects the fact that the commencement rules for the source legislation relevant to the paragraph (a) and paragraph (b) elements of the definition, in clause 476(3), of a "foreign capital redemption policy" have different dates. It is similar in approach to that in the paragraph for "certain pre-17th March 1998 policies not foreign policies of life insurance". As was the case earlier in this Schedule for "certain pre-23rd February 1984 policies not foreign capital redemption policies", the paragraph is based on sections 553(10) and 553B of ICTA.

293.     The paragraph sets out a general rule that policies issued in respect of an insurance made before 23 March 1999 are not foreign capital redemption policies, unless conditions are met which only affect policies within the paragraph (a) element. This ensures that policies falling within the paragraph (b) element of the definition do so only if they are issued in respect of a contract made on or after that date.

294.     The condition under which an older policy is a foreign capital redemption policy is that policies are within the paragraph (a) element of the definition, subject to the commencement rule for "certain pre-23rd February 1984 policies not foreign capital redemption policies".

Pre-9th April 2003 contract or policy: UK resident trustees

295.     This paragraph reflects the commencement rules for the source legislation which introduced the provision rewritten as condition C in clause 467(5). It is based on section 547(4A) of ICTA.

296.     Sub-paragraphs (2) and (3) define the policies and contracts, gains from which benefit from this exception to the scope of clause 467, and disapply the exception in sub-paragraph (1) if the policy or contract 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 are based on paragraph 12 of Schedule 34 to FA 2003.

297.     Sub-paragraphs (3) and (4) incorporate a correction to the source legislation, so that it applies in the case of a life annuity contract as it does in the case of a policy of life insurance or a capital redemption policy. Paragraph 12(4)(a) of Schedule 34 to FA 2003 finishes with the words "(any exercise of rights conferred by the policy being regarded for this purpose as a variation)". It should refer to the policy or contract.

298.     No distinction between policies and contracts was intended and it is clear from the opening words of paragraph 12 of Schedule 34 to FA 2003, which refer to "A policy or contract" that both are in mind. This paragraph makes clear that, if rights conferred by a contract for a life annuity made before 9 April 2003 are exercised on or after that date, the contract is regarded as having been varied. These sub-paragraphs are based on paragraph 12 of Schedule 34 to FA 2003.

Pre-9th April 2003 contract or policy: loans to trustees

299.     This paragraph reflects the commencement rules of the source legislation, which added loans to trustees to the scope of the provisions rewritten in clauses 500(c) and 501. It is based on paragraph 9 of Schedule 34 to FA 2003.

Pre-9th April 2003 contract or policy: excepted group life policies

300.     This paragraph is based on paragraph 4 of Schedule 34 to FA 2003. Sub-paragraphs (1) and (4) of this paragraph carry the benefit for certain group life policies of paragraph 4(1) of Schedule 34 to FA 2003 through the date (6 April 2005) from which this Bill has effect. The policies in question were taken out before 9 April 2003 and would not otherwise satisfy the conditions in clauses 481 and 482 for the exclusion provided by clause 480, but had benefited under paragraph 4(1) of Schedule 34 to FA 2003.

301.     Paragraph 4(1) of Schedule 34 to FA 2003 provided a period in which, subject to conditions, a group life policy, not satisfying the conditions in section 539A of ICTA for exclusion under section 539(2)(f) of ICTA from the scope of Chapter 2 of Part 13 of that Act, could be varied to comply with section 539A of ICTA. That paragraph also provided that such a policy, if varied, would be treated as having complied with those conditions.

302.     Sub-paragraphs (2) and (3) similarly preserve the treatment of a replacement policy and the replaced policy under paragraph 4(3) of Schedule 34 to FA 2003 as a single policy, where the replacement was made to comply with section 539A of ICTA.

Pre-3rd March 2004 contract or policy: calculation of deficiencies

303.     This paragraph reflects the commencement provision for the restriction in clause 541 of the relief for a deficiency under clause 539 by reference to gains for which the individual in question has been liable to tax. It is based on section 140 of FA 2004.

304.     As is usual, the benefit of this paragraph is lost if the policy or contract is varied in certain ways after the relevant commencement date.

Pre-1st January 2005 contracts for immediate needs annuities: income tax treated as paid

305.     FA 2004 placed certain annuities in a different category, for the purposes of the tax charge on insurance companies, and provided an exemption from income tax on the annuity payments (see clause 725). This paragraph ensures that any such annuities in existence at the beginning of 2005 do not, by reason of the change to the taxation rules for insurance companies, lose entitlement to the income tax allowance under clause 530. It is based on section 147 of FA 2004.

Part 7: Savings and investment income: gains from contracts for life insurance etc. (personal portfolio bonds)

Overview

306.     This part of this Schedule is wholly concerned with that part of the Personal Portfolio Bonds (Tax) Regulations SI 1999/1029 (abbreviated in this commentary as "PPB(T)R") which applies to policies and contracts in existence before 17 March 1998. It is based on regulation 3 of PPB(T)R. It also takes into account part of ESC B53 as it applies to such policies and contracts.

Pre-17th March 1998 contract or policy: conditions to be met for contract or policy not to be a personal portfolio bond

307.     This paragraph sets out the conditions to be satisfied if such a pre-17 March 1998 policy or contract is to avoid being a personal portfolio bond. It is based on regulation 3 of PPB(T)R. The "date condition" and the "non-variation condition" are similar to the commencement rules commonly met when the scope of the chargeable event gains regime has been amended. See the notes on paragraphs in Part 6 of this Schedule, where such similar conditions apply (for example: "pre-20th March 1968 policies and contracts excluded from Chapter 9 of Part 4").

The date condition

308.     This paragraph is based on regulation 3 of PPB(T)R.

The non-variation condition

309.     This paragraph is based on regulation 3 of PPB(T)R.

The first selection condition

310.     A policy or contract must meet the first or second selection condition. This paragraph sets out the simpler of the two, that any index or property used to determine benefits under the policy or contract has, at all times in the period after 5 April 1994 (or the commencement of the policy or contract, if later) to the date the policy or contract is being assessed against the conditions, fallen within permitted categories. The 1994 terminal date is a pragmatic reflection of the potential difficulty of establishing compliance with this condition in more distant periods. This paragraph is based on regulation 3 of PPB(T)R.

The second selection condition

311.     This paragraph is based on regulation 3 of PPB(T)R. The second selection condition applies where a policy:

  • which does not meet the first selection condition; but

  • whose benefits have not in fact been determined by reference to an index or property outside the permitted categories;

  • is varied by the end of the first insurance year beginning on or after 6 April 1999 to eliminate any such index or property outside the permitted categories.

312.     In effect, the second selection condition provides a period of grace for a policy or contract to put itself into a comparable state to one meeting the first selection condition.

Policy holders becoming UK resident after 17th March 1998

313.     This paragraph defines and may extend the period of grace in the second selection condition where the holder of the policy or contract is non-UK resident on 17 March 1998 but subsequently becomes so, although not then intending to become permanently UK resident or to stay at least two years. It is based on regulations 3 and 5 of PPB(T)R.

314.     Where such a holder is an individual, Part 1 of ESC B53 (rewritten in part in clause 465(1)) would excuse such a holder from the income tax for which that holder is liable on a gain for a tax year in which the holder is not UK resident.

315.     This paragraph (which incorporates material from Part 3 of ESC B53) seeks to give a newly UK resident holder of a policy or contract time in which to make the necessary variation to the policy or contract, so as to meet the second selection condition.

316.     Sub-paragraph (2) provides the terminal date by which the policy must be varied if it is to meet condition C of the second selection condition (see "the second selection condition").

317.     As the holder did not intend to become permanently UK resident, or to stay for at least two years, the variation must be carried out before the end of the first insurance year beginning after UK residence first begins by virtue of arrival after 17 March 1998 (or the first insurance year ending on 5 April 2000 or later, where that is more beneficial). Given that residence is in strictness for a year, UK residence will begin on 6 April preceding arrival. The holder may have as little as a day or two in which to make the variation. Although ESC A11 splits income in that first year of United Kingdom residence, treating income up to the day of arrival as not chargeable, and uses similar criteria regarding a person's intentions, it has no bearing on the operation of the rule here.

318.     Sub-paragraph (3) further relaxes the incidence of the special personal portfolio bond charge where a policy or contract meets the second selection condition (and otherwise meets the terms of the first paragraph in this Part of this Schedule) by virtue of the extended period of grace given by the modification of the second selection condition (see "pre-17th March 1998 contract or policy: the second selection condition").

319.     Until the required variation is made, and the second selection condition is met, the policy or contract may be a personal portfolio bond. An insurance year may end after the relevant date and before the variation is made, so triggering a gain under clause 525.

320.     This sub-paragraph sets aside that gain, so that no chargeable event under clause 525 occurs, and no-one is liable under clauses 465 to 468. If need be, corrective action will be taken under the Self Assessment system to negate any assessment made before the variation took effect.

321.     See Change 157 in Annex 1.

Policy holders becoming permanently UK resident after 17th March 1998

322.     This paragraph performs the same function as the preceding paragraph, with the difference that it deals with policyholders who intend to become permanently UK resident or to stay at least two years. It is based on regulation 3 of PPB(T)R.

323.     The effect of that difference of intention shows up in sub-paragraph (2)(b). The terminal date by which the policy must be varied if it is to meet condition C of the second selection condition is reckoned from the policy year beginning after the relevant date of arrival in the United Kingdom, rather than that beginning after the commencement of UK residence. The holder will therefore have at least 12 months from arrival, perhaps nearly two years, in which to effect the necessary variation.

324.     Sub-paragraph (3) has the same effect as the equivalent sub-paragraph in the preceding paragraph, but with effect over a longer period.

325.     See Change 157 in Annex 1.

Meaning of "permitted index"

326.     This paragraph is based on regulation 3 of PPB(T)R.

Meaning of "permitted property"

327.     This paragraph is based on regulation 3 of PPB(T)R.

328.     It extends the categories of permitted property, for the purposes of the first and second selection conditions in this Part of this Schedule, beyond those listed in clause 520. The added categories are all stocks and shares listed or dealt with in open markets after the beginning of the period mentioned in the first and second selection conditions. (The Alternative Investment Market succeeded the Unlisted Securities Market.)

329.     Sub-paragraph (2) puts a cap on stocks and shares listed on those markets which are not a recognised stock exchange, where the investment in the company exceeds 10% of:

  • the issued share capital of the company; or

  • the total amount of premiums paid under the policy or contract.

330.     The reference to "the total amount of premiums paid" in sub-paragraph (2)(b) is to be construed in accordance with the definitions in clause 545.

Other definitions

331.     This paragraph is based on regulations 2 and 3 of PPB(T)R.

Part 8: Miscellaneous income

Income treated as income of settlor: exception for pension income

332.     Clause 627 excludes benefits from relevant pension schemes from being treated as the settlor's income under clause 624. The exclusion for "relevant pension scheme" in subsection (3) of that clause apply for the tax year 2006-07 onwards. This paragraph gives the rules that apply for the tax year 2005-06 and represents a rewrite of section 660A(11) of ICTA as it stands before the amendments made by FA 2004.

333.     Subsection (3)(g) of clause 627 refers to regulations made under the Welfare Reform and Pensions Act 1999 and its Northern Ireland equivalent although section 660A(11)(g) of ICTA simply refers to regulations made by the Secretary of State. See Change 105 in Annex 1.

334.     Subparagraph (4) attracts the consequential and transitional powers for pensions in FA 2004 to the rewrite of those provisions in this Bill.

Amounts treated as income of settlor: income paid to unmarried minor child of settlor

335.     Section 64 of FA 1999 amended section 660B of ICTA principally to enable a charge on the settlor to be made where a settlor's minor child benefited from a bare trust arrangement. The income arising in the trust did not have to be paid to or for the benefit of the child for a charge on the settlor to arise. It was simply sufficient for the income to be treated as the child's income. The new provision applied only where the settlement was made or entered into after 8 March 1999 or, if it was not, to income that arose from funds provided after that date. This paragraph enables the pre-amendment legislation to apply to pre-March 1999 settlements.

336.     Sub-paragraph (3) applies instead of sub-paragraph (2) where the income paid to the minor child is partly from pre-March 1999 funds and partly other funds, such as where there has been an injection of funds into the settlement after 9 March 1999.

Amounts treated as income of settlor: capital sums paid to settlor by trustees of settlement

337.     This paragraph applies where it is necessary to consider years before 1995-96 in applying the charge under clause 633.

338.     Section 677(2) of ICTA excludes from income available to cover capital payments made to a settlor income within the settlement that has already been treated as the settlor's. Section 677(2) of ICTA is rewritten in clause 635. Sub-paragraphs (2) and (3) rewrite the categories in section 677(2) of ICTA that only apply in respect of income arising under a settlement before the tax year 1995-96 but which may still have effect when calculating the income available up to the end of a tax year for the purposes of clause 633.

339.     Sub-paragraph (5). This saving may still have application where the direction or assignment precedes by some years the capital payment. (Capital payments are no longer charged after 11 years or 16 years if made through a company associated with the settlement, see clauses 633 and 643).

Part 9: Exempt income

Purchased life annuity payments: old determinations concerning capital elements

340.     This paragraph ensures that determinations as to the capital element of a purchased life annuity made before 6 April 2005 translate into exempt amounts for the purposes of Chapter 7 of Part 6 of this Bill so that the determination continues to have effect after 6 April 2005.

Purchased life annuity payments: carry forward of excess capital elements

341.     If the amount of an annuity payment is less than the capital element calculated under the constant sum method in section 656(2) of ICTA, ESC A46 allows the excess of the capital element over the gross annuity to be carried forward to increase the capital element to be set against the next annuity payment. Clause 719(5) gives statutory effect to that concession. This paragraph enables such excesses that were not absorbed by annuity payments made before the tax year 2004-05 to be carried forward by increasing the exempt amount of the first payment made after 5 April 2005. See Change 119.

Purchased life annuity payments: penalty for false statements

342.     This paragraph makes clear that it is the date of the statement or representation which determines which penalty provision applies.

Certain annual payments by individuals

343.     Clauses 727 and 730 provide exemption from income tax in respect of certain annual payments. They are based on section 347A of ICTA. Section 347A of ICTA applies to all payments falling due on or after 6 April 2000 and also to certain payments falling due before that date but on or after 16 March 1988. Although unlikely, it is possible for payments to fall due at a time when section 347A of ICTA did not apply but to be paid after 6 April 2005. The transitional provision determines whether the exemptions apply.

Annuity payments for non-taxable consideration

344.     A payment made by an individual is not exempt from income tax in the recipient's hands under clause 729 if the payment is made for non-taxable consideration unless either condition B or C in that clause is satisfied. This paragraph adds a further condition which, if satisfied, renders the payment exempt in the recipient's hands.

Periodical payments of personal injury damages etc

345.     Clauses 731 and 732 provide exemptions from income tax for periodical payments in respect of damages for personal injury and annuity payments under annuities purchased under an award made under the Criminal Injuries Compensation Scheme. They are based on sections 329AA and 329AB of ICTA as amended by section 100(2) of the Courts Act 2003. Section 100(2) of the Courts Act 2003 is not yet in force in December 2004. But it is likely that it will be brought into force before this Bill comes into effect. Clauses 731 and 732 have therefore been rewritten on the assumption that on enactment of this Bill, section 100(2) of the Courts Act 2003 is in force. The transitional provision ensures, however, that the pre-Courts Act 2003 version of the legislation in ICTA continues in effect until such time as section 100(2) of the Courts Act 2003 is brought into effect.

Part 11: Foreign income: special rules

Relevant foreign income charged on remittance basis: income arising before the tax year 2005-06

346.     This paragraph ensures that Chapter 2 of Part 8 of this Bill is not restricted in its operation to income that arose in the tax year 2005-06 or later (whenever remitted).

Relevant foreign income charged on remittance basis: delayed remittances

347.     This paragraph is based on section 585 of ICTA. It ensures that the relief given by clause 835 is not restricted to income that arose after the tax year 2004-05. It also preserves the rules for tax years before 1997-98 (that is, years before Self Assessment came into effect) when the basis period for many charges was a period other than the current tax year.

Relief for back-dated pensions charged on arising basis

348.     This paragraph ensures that the relief given by clause 840 is not restricted to income that arose after the tax year 2004-05. See Change 139 in Annex 1.

Unremittable income that arose before the tax year 2005-06

349.     This paragraph ensures that the relief given by Chapter 4 of Part 8 of this Bill, and any withdrawal of that relief by virtue of clauses 843 or 844, is not restricted to income that arose after the tax year 2004-05 or, as regards withdrawal of relief, to claims under that Chapter.

350.     The paragraph also preserves access to the jurisdiction of the Special Commissioners on an appeal involving the application of Chapter 4 of Part 8 of this Bill (and of section 584 of ICTA, which that Chapter rewrites), where income arising in a year before the tax year 2005-06 is material to the appeal. This sub-paragraph is based on section 584(9) of ICTA. See Change 142 in Annex 1.

 
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Prepared: 3 December 2004