This change provides a clarification of the law. But it is expected to have no practical effect as it is in line with current practice.

Change 96: Gains from contracts for life insurance etc: reduction in gains where non-UK resident trustees hold policy: clause 529

This adopts the conditions for trustees' residence in section 110 of FA 1989 for the purposes of the disapplication of the rule in section 553(3) of ICTA about reduction of gains chargeable under Chapter 2 of Part 13 of ICTA where the policy was held by non-UK resident trustees.

Section 553(3) of ICTA provides that in the case of new non-resident policies and new offshore capital redemption policies (as defined in section 553(10) of ICTA) the gain that would otherwise arise under sections 541 or 546C(7)(b) of ICTA is reduced to the proportion of it that corresponds with the proportion of the period during which the policy has been in force that the policyholder was resident in the United Kingdom.

Under section 553(5) of ICTA if, when the gain arises or at any time during that period, the policy is or was held by a trustee resident outside the United Kingdom or by two or more trustees any of whom is or was so resident, the reduction under 553(3) of ICTA is only made if:

     (a)     the insurance was made before 20 March 1985; and

     (b)     on 19 March 1985 the policy was held by a trustee who was so resident or, as the case may be, by two or more trustees any of whom was so resident.

However, the residence of a body of trustees is now generally determined by section 110 of FA 1989, so that if at least one of them is and at least one of them is not UK resident, they are all treated as UK resident or not UK resident according to the rule in section 110(1) of FA 1989, regardless of their individual status. Under section 110(6) of FA 1989, that section only applies for the tax year 1989-90 and subsequent years, so it would not apply to determine the trustees' residence for section 553(5) of ICTA before that time.

Clause 529(1) rewrites section 553(5) of ICTA for insurances made on or after 20 March 1985. Clause 529 (1)(b) disapplies clause 528 (the rewritten section 553(3) of ICTA) if, when the gain arises or at any time during the policy period, the policy is or was held by non-UK resident trustees. So the trustees are looked at as a group, rather than individually. Clause 529(2) applies section 110 of FA 1989 whenever the policy period starts. Therefore the same test for the trustees' residence will apply throughout.

This change provides a clarification of the law. But it is expected to have no practical effect as it is in line with current practice.

Change 97: Gains from contracts for life insurance etc: clarification of entitlement to credit for income tax at the lower rate in the case of certain foreign life insurance policies: clause 531(5)

This change clarifies the interpretation of section 553A(3) of ICTA, making it clear that an individual who is chargeable on gains from certain foreign life insurance policies is treated as having paid income tax at the lower rate under section 547(5) of ICTA.

Under section 547(1)(a) of ICTA a gain treated as arising on a chargeable event may be treated as part of an individual's total income. Section 547(5) of ICTA provides that the individual is treated as having paid income tax at the lower rate on the amount so treated. This is subject to some complex exceptions which deny the relief to certain foreign contracts and policies.

Section 547(6) of ICTA denies the benefit of section 547(5) of ICTA to certain life annuity contracts except where section 547(6A) and (7) of ICTA apply. (The exception in section 547(6A) of ICTA is not relevant here.) Section 547(7) of ICTA disapplies section 547(5) of ICTA for gains in connection with policies issued by a friendly society in the course of tax exempt life or endowment business, except so far as calculating top slicing relief under section 550 of ICTA is concerned.

Section 553 of ICTA makes provision about certain foreign policies. Section 553(6) of ICTA denies the benefit of section 547(5) of ICTA to new non-resident policies and new offshore capital redemption policies subject to similar exceptions to those that apply to section 547(6) of ICTA. (The exception in section 553(6A) of ICTA corresponds to that in section 547(6A) of ICTA and is not relevant here.) Section 553(7) of ICTA disapplies section 553(6) of ICTA where a new non-resident policy meets the conditions in paragraph 24(3) of Schedule 15 to ICTA (policies which are part of the insurer's UK taxed business).

Section 553A of ICTA makes provision about a further class of "foreign policy" (policies issued as part of the overseas life assurance business of a UK insurer). Section 553A(1) of ICTA provides that these are treated as if they were new non-resident policies, and so they would come within the terms of section 553(7) of ICTA if they met the conditions in paragraph 24(3) of Schedule 15 to ICTA. But section 553A(3) of ICTA provides that section 553(7) of ICTA does not apply to gains arising on new non-resident policies.

However, the intention was that section 553A(3) of ICTA should only apply to policies treated as new non-resident policies under section 553A(1) of ICTA and in practice that is how it is interpreted. Otherwise, section 553(7) of ICTA would be otiose.

Section 553(7) of ICTA is rewritten in clause 531 so that it continues to apply to foreign policies of life insurance (see clause 531(3)), other than those which meet the conditions in clause 531(5) and (6). Clause 531(5) refers to policies within paragraph (a) of the definition of a "foreign policy of life insurance" in clause 476(3). Policies that are foreign policies by virtue of section 553A of ICTA are covered by paragraph (b) of that definition and so they are excluded.

This change is in taxpayers' favour in principle. But it is expected to have no practical effect as it is in line with current practice.

Change 98: Gains from contracts for life insurance etc: removal of requirement for claims for top slicing relief: clause 535(1)

This change removes the requirement that a claim must be made for relief to be given under section 550 of ICTA in respect of tax on gains under Chapter 2 of Part 13 of ICTA.

Although a gain that is chargeable under Chapter 2 of Part 13 of ICTA will accrue over the life of an insurance, the whole of the gain will usually fall to be charged in one tax year. Higher rate tax liability may therefore arise when there would have been no such liability had the gain been spread throughout the period of the insurance. To compensate for the effect of assessing a gain in a single year, section 550 of ICTA provides for relief to be given. The relief only applies where there is a charge to higher rate tax and it is the chargeable event gain itself which brings the taxpayer into the higher rate field.

Section 550(1) of ICTA provides that the relief is given on the making of a claim to the Board of Inland Revenue. In practice, however, relief under section 550 of ICTA is given automatically, just as relief for deficiencies under section 549 of ICTA is given, and the requirement for a claim for relief is ignored.

Therefore in rewriting section 550 of ICTA, clause 535(1) provides that a person is entitled to relief in the relevant circumstances, but does not require that a claim be made before the relief is given.

This change has no implications for the amount of tax due, who pays it or when. It affects (in principle and in practice) only administrative matters.

Change 99: Gains from contracts for life insurance etc: definition of "insurance company": clause 545(1)

This change introduces a definition of "insurance company" for the purposes of the chargeable event gains regime in Chapter 2 of Part 13 of ICTA.

Although Chapter 2 of Part 13 of ICTA contains several references to insurance companies, it does not define "insurance company". This is inconsistent with more recent legislation using the term "insurance company" which does provide a definition. See, for instance, section 333B(9) of ICTA (insurance element of individual savings accounts), which was inserted by FA 1998 and amended by the Financial Services and Markets Act 2000 (Consequential Amendments) (Taxes) Order 2001 (S I 2000/3629). In practice, the definition in section 333B(9) of ICTA is the one used for the purposes of Chapter 2 of Part 13 of ICTA too.

Accordingly, that definition has been adopted in clause 545(1) for the purposes of the whole of Chapter 9 of Part 4 of the Bill.

This change provides a clarification of the law. But it is expected to have no practical effect as it is in line with current practice.

Change 100: Gains from contracts for life insurance etc: definition of "market value": clause 545(1)

This change involves defining "market value" for the purposes of the provisions which relate to gains from contracts for life insurance etc.

Section 541(3) of ICTA provides that where an assignment of the rights under a policy of life insurance takes place between connected persons, it is deemed to have been made for a consideration equal to the market value of the rights assigned. Section 543(2) of ICTA applies the same rule to an assignment of the rights conferred by a contract for a life annuity between connected persons. "Market value" is not defined for either purpose.

The definition of "market value" in clause 545(1) is by reference to section 272 of TCGA but it also mentions section 273 of that Act. Section 272(1) of TCGA defines the "market value" of assets as the price which those assets might reasonably be expected to fetch on a sale in the open market. The remainder of section 272, and section 273, of TCGA provide some further guidance about the operation of the rule in different contexts.

The definition of "market value" reflects the ordinary common sense meaning of that term, and so how that term as it relates to Chapter 2 of Part 13 of ICTA would otherwise be understood.

The intention behind sections 541(3) and 543(2) of ICTA is that the consideration that would have been payable on an arm's length transaction is brought into account. The definition of "market value" makes this clear.

Similarly, where it is necessary for the purposes of Chapter 2 of Part 13 of ICTA to value property other than cash transferred to an insurance company in satisfaction of a premium, the price the property would achieve on an open market sale will be used. Again the definition will clarify that this is the approach taken.

This change provides a clarification of the law. But it is expected to have no practical effect as it is in line with current practice.

Change 101: Disposals of futures and options involving guaranteed returns: foreign non-trading income: clause 555

This change provides for profits and gains, other than trading profits, that arise from disposals of futures and options involving guaranteed returns and fall within Schedule D Case V to be charged to tax under Chapter 12 of Part 4 of the Bill (which rewrites Schedule 5AA to ICTA: disposals of futures and options involving guaranteed returns).

Paragraph 1(2) of Schedule 5AA to ICTA excludes from the charge under that Schedule "so much of any profits or gains arising to a person from a transaction as are charged to tax in his case under Case I or Case V of Schedule D". It appears that the intention in mentioning Schedule D Case V was to exclude foreign trade profits, rather than all income that falls into Schedule D Case V.

Following the decision in Cooper v Stubbs (1925),10 TC 29 CA, profits of the kind charged by Schedule 5AA to ICTA would fall into Schedule D Case VI if they were from a source in the United Kingdom and not trading profits. So if such profits arose from a foreign possession other than a trade, they would be chargeable under Schedule D Case V. However, income from such dealing is extremely unlikely to arise outside the United Kingdom in the hands of a United Kingdom resident.

Section 128(1) of ICTA exempts from any charge to tax under Schedule D "any gain arising to a person in the course of dealing in commodity or financial futures or in qualifying options, which is not chargeable to tax in accordance with Schedule 5AA to ICTA and apart from [that section] would constitute profits or gains chargeable to tax under Schedule D otherwise than as the profits of a trade".

The result of a person's gains of this kind being exempted by section 128 is that the person's outstanding obligations under any futures contract entered into in the course of the dealing in question and any qualifying option granted or acquired in the course of it are regarded under section 143(1) of TCGA as chargeable assets, so that gains on their disposal fall within that Act.

Therefore if all gains from disposals of futures and options involving guaranteed returns that are foreign income within Schedule D Case V, other than those that constitute trade profits, are excluded from the charge under Schedule 5AA to ICTA by paragraph 1(2) of that Schedule, they are exempted from income tax, only to be treated as capital gains. There is no obvious reason why income of this sort should have been treated in this way. So it appears that paragraph 1(2) of Schedule 5AA to ICTA should have excluded from the charge under that Schedule only profits or gains charged to tax under Schedule D Case I or Case V "as the profits of a trade", so as to correspond with the wording of section 128(1) of ICTA.

Schedule 5AA to ICTA is rewritten in Chapter 12 of Part 4 of the Bill and the charge in clause 555 does not exclude foreign profits and gains from disposals. The former residual charge under Schedule D Case V on foreign profits and gains from disposals that are not trading profits is rewritten in Chapter 8 of Part 5 of this Bill. Since the charge in clause 687 of that Chapter only applies to income not otherwise charged to income tax, it will not apply to foreign profits charged under Chapter 12 of Part 4. So they will fall solely within that Chapter. The exemption under section 128 of ICTA is rewritten in clause 779 but will not apply to these foreign profits, since it only applies to income within Chapter 8 of Part 5 of this Bill.

This change is adverse to some taxpayers and favourable to others in principle. But it is expected to have no practical effect as it is in line with current practice.

Change 102: Guaranteed returns on futures and options: associated companies: clause 561

This change relates to the omission of references to associated companies in paragraph 5(3) and (4) of Schedule 5AA to ICTA.

Schedule 5AA to ICTA (guaranteed returns on transactions in futures and options) originally applied for both income tax and corporation tax purposes. Paragraph 5 of Schedule 5AA explains the meaning of references in the Schedule to the return from one or more disposals. Under paragraph 5(1)(a) these are references to the return on investment represented by the total net profits and gains arising from the disposal or disposals.

Paragraph 5(2) of Schedule 5AA provides that where profits and gains are realised on more than one disposal by associated persons those profits or gains are treated as realised by the same person. Paragraph 5(3) then explains when persons are associated for the purposes of paragraph 5(2). The definition includes persons who are or have been associated companies (see paragraph 5(3)(b) and (3)(c)), and "associated company" is defined in paragraph 5(4) by reference to section 416 of ICTA.

FA 2002 amended Schedule 5AA to ICTA so that it does not apply for corporation tax purposes with effect for accounting periods beginning after 30 September 2002. It repealed most references in the Schedule to companies. Although Schedule 5AA continues to apply to companies liable to income tax, companies are only so liable if they are acting in a fiduciary or representative capacity or are non-resident. The extension of the definition of associated person to include associated companies was not originally intended to refer to companies liable to income tax (although it could do so) and appears to have been overlooked when Schedule 5AA was amended in 2002. The provisions about when persons are associated for this purpose in clause 561(3) to (6) does not include association by companies.

This change is in taxpayers' favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small.

Change 103: Charge on income treated as arising from foreign holdings: foreign dividend coupons: clause 570

This change clarifies two points in rewriting section 18(3B) of ICTA. First, that a "bank in the United Kingdom" means a bank's office in the United Kingdom, whether the bank is resident in the United Kingdom or abroad. Second, that a "dealer in coupons in the United Kingdom" means a coupon dealer carrying on business in the United Kingdom, whether the dealer is resident in the United Kingdom or abroad.

Section 18(3B) of ICTA provides that a charge under Schedule D Cases IV or V arises on the sale or other realisation of coupons for foreign dividends by a "..bank in the United Kingdom.." which pays over the proceeds or carries them to an account. This is interpreted by the Inland Revenue to mean the office in the United Kingdom of a bank, whether that bank is incorporated in the United Kingdom or abroad. Similarly, a sale of such coupons to a "..dealer in coupons in the United Kingdom.." is taken to mean a coupon dealer carrying on business in the United Kingdom, whether resident in the United Kingdom or abroad.

Clause 570 is based principally on section 18(3) and (3B) of ICTA. It treats income as arising from foreign holdings where a dividend coupon attached to the holding is (a) sold or otherwise realised by a bank in the United Kingdom, or (b) sold to a coupon dealer in the United Kingdom by someone other than a bank or coupon dealer. So subsection (3) of the clause refers to "..a bank's office in the United Kingdom.." and subsection (4) refers to a person "..dealing in coupons in the United Kingdom.." in rewriting section 18(3B) of ICTA.

This change has no implications for the amount of tax paid, who pays it or when.

Change 104: Death of a seller of patent rights: time for serving notice: clauses 593 and 862

This change relates to the correction of an omission to revise, in connection with the Self Assessment reforms, the time limit for serving a notice under section 525(2) of ICTA.

Section 525(2) of ICTA sets a period within which the personal representatives of a seller of patent rights who has died may claim a reduction in the tax payable out of the estate. The claim must be made "not later than 30 days after notice has been served on them" of the charge falling to be made under section 525(1) of ICTA.

The system of Self Assessment for personal tax applied from the tax year 1996-97 onwards. Schedule 21 to FA 1996 contained amendments of provisions setting time limits for claims, elections etc to align them with the time limits for certain actions under the Self Assessment system, such as the filing of tax returns. The normal time limit for filing a personal return containing a self-assessment is 31 January following the tax year to which the return relates.

When a person dies, his personal representatives are responsible for making any Self Assessment return for the year of death and agreeing and settling all tax liabilities up to and including the year of death. It therefore makes sense to align the time limit in section 525(2) of ICTA with the normal Self Assessment time limit.

Schedule 21 to FA 1996 did not amend the time limit in section 525(2) of ICTA. This omission has been corrected by revising the time limit in the rewritten legislation.

This change has no implications for the amount of tax due, who pays it or when. It affects (in principle and in practice) only administrative matters.

Change 105: Settlements: approved pension arrangements: clause 627 and Schedule 2

This change provides for pension arrangements prescribed by regulations made under the Welfare Reform and Pensions Act 1999 and the Welfare and Reform and Pensions (Northern Ireland) Order 1999 to fall within the definition of a "relevant pension scheme", benefits of which are not treated as income of the settlor. This is in place of a pension arrangement of any description which may be prescribed by regulations made by the Secretary of State under section 660A(11)(c) of ICTA (and section 660A(11)(g) for 2005-06).

Section 660A(1) of ICTA treats as income of the settlor income arising under a settlement from property in which the settlor retains an interest. But Section 660A(9)(c) of ICTA provides that a benefit under a relevant pension scheme will not be treated as the settlor's income. Section 660A(11) of ICTA defines a relevant pension scheme. This includes (subsection (11)(c)) "a pension scheme of any description which may be prescribed by regulations made by the Secretary of State".

The exclusion from the settlements charge for benefits from certain pension schemes was introduced into the settlements legislation by paragraph 26 of Schedule 13 to FA 2000 as section 660A(11). Section 660A(11)(g) of ICTA included within the approved arrangements pensions prescribed by regulations made by the Secretary of State. Paragraph 28 of Schedule 35 to FA 2004 amended these provisions for the tax year 2006-07 onwards but retained the exemption for pensions prescribed by regulations previously in section 660A(11)(g) of ICTA. The purpose of section 660A(11)(g) of ICTA was to provide the powers for regulations to be made by the Secretary of State. The wording of paragraph 26 of Schedule 13 to FA 2000 was borrowed almost in its entirety from section 11(2) of the Welfare Reform and Pensions Act 1999. But, in error, section 83 of that Act, which provides the supporting legislation for such regulations, was not legislated in FA 2000.

As a result, the powers in section 660A(11)(g) of ICTA and, following FA 2004, subsection 11(c) are inadequate to make regulations. However the intention was that regulations made under section 660A(11)(g) of ICTA (and hence also, for the tax year 2006-07 onwards, section 660A(11)(c) of ICTA) should be the same as those made under section 11(2)(h) of the Welfare Reform and Pensions Act (currently the Occupational and Personal Pension Schemes (Bankruptcy) (No 2) Regulations SI 2002/836) and in practice the pension arrangements in these regulations are accepted under section 600A(11)(g) of ICTA.

Rather than rewrite in Chapter 5 of Part 5 of this Bill the powers in section 83 of the Welfare Reform and Pensions Act, it is considered simpler to include directly the arrangements within the regulations made under that Act. A reference to the equivalent legislation for Northern Ireland (Article 12(2)(h) of the Welfare and Reform and Pensions (Northern Ireland) Order 1999) has also been included. The relevant regulations here are in SI 1999/3417 (N.I.11).

The reference in section 660A(11)(g) (and (11)(c)) of ICTA to "Secretary of State" is not rewritten as it is, as a result of this change, unnecessary.

This change is in taxpayers' favour in principle. But it is expected to have no practical effect as it is in line with current practice.

Change 106: Beneficiaries' income from estates in administration: set off of excess of allowable estate deductions in the final tax year of the administration period: beneficiaries with absolute interests : clause 660

This change provides for any amounts that are allowable against the aggregate income of the estate in calculating the residuary income of the estate in the tax year in which the administration period ends, but cannot be so allowed because they exceed that income, to be set off against the amount in respect of which the beneficiary with an absolute interest is taxable or, if there is more than such beneficiary, for a just and reasonable part to be set off.

Section 697(1A) of ICTA provides that where the deductions for any year exceed the aggregate income of the estate, the excess shall be carried forward and treated as an allowable deduction in the following year. Clearly, this is not possible in the tax year in which the administration period ends. In practice, however, excess deductions may be set off against any residuary income of the estate which has not been paid out. (This is often necessary since personal representatives may incur a high proportion of expense on the estate towards the end of the administration period, for example, because of the billing of legal or accountancy fees at the end.)

In rewriting section 697(1A) of ICTA, clause 660(3) reflects that practice by providing for a person's basic amount of estate income for that year (that is, the person's share of the residuary income of the estate that has not yet been paid out) to be reduced by the excess deductions. If there is more than one absolute interest in the residue of the estate at the end of the administration period a just and reasonable part of the excess is subtracted.

This change is in taxpayers' favour in principle. But it is expected to have no practical effect as it is in line with current practice.

Change 107: Beneficiaries' income from estates in administration: exclusion of income from specific dispositions and income from contingent interests from the aggregate income of the estate: clauses 664 and 666

This change excludes income from specific dispositions and income from contingent interests from the aggregate income of an estate (which is used to compute the residuary income of an estate and hence affects the amount of estate income that is chargeable to tax where a person has an absolute interest in the estate) and from the deductions made in determining the residuary income of the estate.

The aggregate income of the estate is defined in section 701(8) of ICTA as:

the aggregate income from all sources (for the tax year in question) of the personal representatives of the deceased as such, treated as consisting of -

(a) any such income which is chargeable to United Kingdom income tax by deduction or otherwise, such income being computed at the amount on which tax falls to be borne for that year; and

(b) any such income which would have been so chargeable if it had arisen in the United Kingdom to a person resident and ordinarily resident there, such income being computed at the full amount thereof actually arising during the year, less such deductions as would have been allowable if it had been charged to United Kingdom income tax;

but excluding any income from the property devolving on the personal representatives otherwise than as assets for the payment of the debts of the deceased.

Property that is the subject of a specific disposition is available for the payment of the deceased's debts and so is not excluded. However, under section 697(1)(b) of ICTA "the amount of any of the aggregate income of the estate for [a tax year] to which a person has on or after assent become entitled by virtue of a specific disposition either for a vested interest during the administration period or for a vested or contingent interest on the completion of the administration" is deductible from the aggregate income of the estate for that year in calculating the amount of the residuary income of an estate for that year. The Scottish version of this provision omits the words "on or after assent" and the words following "specific disposition": see section 702(b) of ICTA. But the inclusion of the words "on or after assent" for the rest of the United Kingdom means that much of the income of the specific disposition will form part of the aggregate income. The result is that the measure of the income taken to be available to residuary beneficiaries is inflated.

In practice, the Inland Revenue allow all income from specific dispositions to be deducted from the aggregate income of the estate in calculating the residuary income of the estate for the year of assent and later years. But it is considered simpler for it merely to be excluded from what counts as the aggregate income and not to be deducted from it. Accordingly, the definition of "the aggregate income of the estate" in clause 664 contains an exclusion for all income from specific dispositions to which a person is or may become entitled at subsection (5)(a). In consequence, the deduction for this income in section 697(1)(b) of ICTA and its adaptation for Scotland in section 702(b) of ICTA are not rewritten.

Since tax is treated as having been paid at the basic rate on this income, any reduction in the income taken to be available to beneficiaries as a result of this change will result in beneficiaries who pay tax at rates above the basic rate paying less tax, but those not liable to income tax, or liable to tax only at rates below the basic rate, may not be able to reclaim so much tax.

This change is adverse to some taxpayers and is favourable to others in principle and in practice. But the numbers affected and the amounts involved are likely to be small.Change 108: Beneficiaries' income from estates in administration: removal of the requirement for interest to be annual and a charge on residue to be deductible in calculating the residuary income of the estate: clause 666

This change removes the requirements for interest to be annual and a charge on residue in order to be deductible from the aggregate income of the estate in calculating the residuary income of the estate.

The deductions that are allowable in ascertaining the amount of the residuary income of an estate for a tax year are set out in section 697(1)(a) and (b) of ICTA. Section 697(1)(a) of ICTA refers to "the amount of any annual interest, annuity or other annual payment [for the year] which is a charge on residue ..". There is a definition of "charges on residue" in section 701(6) of ICTA which is adapted for Scotland in section 702(d) of ICTA.

So far as the requirement for the interest to be annual is concerned, historically tax legislation has distinguished between short interest (which was not usually deductible) and annual or yearly interest (which was usually deductible). FA 1969 abolished the general relief for interest paid by taxpayers. However, specific provision was made for relief to continue to be allowed in respect of interest on borrowings for certain purposes. Annual or yearly interest continued to be significant as there was a requirement that tax was deducted from certain payments of yearly interest. But under current law, interest, whether short or annual, may be deducted as an expense in computing the profit or loss of a trade for tax purposes if incurred wholly and exclusively for business purposes. (This is subject to certain restrictions on the deduction of annual interest paid to a person not resident in the United Kingdom and there is still a requirement to deduct tax in certain circumstances in relation to annual interest under section 349(2) of ICTA. For example, where the payment is to a person whose usual place of abode is outside the United Kingdom.)

So far as deductions in calculating residuary income of an estate are concerned, there is no reason, in principle, why short interest paid by the personal representatives should not be deductible. The historic distinction between short interest and annual interest no longer applies in tax legislation generally so it is difficult to justify here.

The other requirement in section 697(1)(a) of ICTA is that the payment of annual interest must be a charge on residue. "Charges on residue" are defined in section 701(6) of ICTA as certain specified liabilities properly payable out of the estate, as well as interest payable in respect of them. The definition is wide enough to include all interest ever likely to be paid by personal representatives, so the requirement that the payment is a charge on residue is otiose for interest.

Therefore, clause 666(2)(a), which rewrites section 697(1)(a) of ICTA, omits the requirements for interest to be annual and a charge on residue before it can be deducted from the aggregate income of the estate to calculate the residuary income of the estate. As a consequence, all interest paid by the personal representatives will be deductible, except for interest on unpaid inheritance tax which is expressly disallowed by section 233(3) of the Inheritance Tax Act 1984.

Since tax is treated as having been paid at the basic rate on this income, any reduction in the income taken to be available to beneficiaries as a result of this change will result in beneficiaries who pay tax at rates above the basic rate paying less tax, but those not liable to income tax, or liable to tax only at rates below the basic rate, may not be able to reclaim so much tax.

This change is adverse to some taxpayers and is favourable to others in principle and in practice. But the numbers affected and the amounts involved are likely to be small.Change 109: Beneficiaries' income from estates in administration: how reduction in share of residuary income of estate under section 697(2) and (3) of ICTA operates for successive absolute interests: clause 671

This change relates to the reduction in the share of the residuary income of the estate required where the amounts actually paid during or payable at the end of the administration period in respect of an absolute interest are less than the share of the residuary income for all tax years and clarifies how the reduction is to be made in cases where the absolute interest has been held successively.

Under section 697(2) of ICTA on the completion of the administration of an estate in which a person has an absolute interest, a comparison is made between the aggregate benefits received in respect of that interest and the aggregate for all years of the residuary income of the person having that interest. If the aggregate of the benefits is less than the aggregate of the residuary income, the amount of the shortfall is to be applied in reducing the person's residuary income for the tax year in which the administration is completed. If that does not exhaust the amount of the shortfall, the remainder is used to reduce the previous tax year's residuary income, and so on for previous tax years. (Section 697(2) of ICTA is rewritten in clause 668.)

Section 697(4) of ICTA provides that if a different person had an absolute interest in the residue at any time in the administration period "the aggregates mentioned in [section 697(2) of ICTA] shall be computed in relation to those interests taken together, and the residuary income of that other person also shall be subject to reduction under [section 697(2) of ICTA]". This is too vague to indicate how the reduction is to be made under section 697(2) of ICTA where there is more than one person with a share of the residuary income of the estate available to be reduced.

One possibility would be for the reduction to be apportioned in some way between the absolute interest holders. But it is not at all obvious how such an apportionment would work because section 697(2) of ICTA requires the excess for the final tax year of the administration period to be used to reduce the last absolute interest holder's residuary income in the previous tax year. So it is not apparent whether that would have to be done before any other person's reduction was made. The other holder or holders of the interest may have held it several tax years before the final year.

Clause 671(5) and (6) provide for the reduction to be made in these circumstances. Clause 671(6) provides that the last absolute interest holder's share of the residuary income should be reduced first. If there is still an excess of residuary income over the gross amount of all sums paid during or payable at the end of the administration period after going through all the years that the final holder had the interest, the excess is then applied to the residuary income of the previous holder for the last tax year that that person had the interest and then to earlier tax years (and earlier absolute interest holders as appropriate) working backwards.