Income Tax (Trading and Other Income) Bill

House of Commons

Session 2004 - 05
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Other Bills before Parliament

Income Tax (Trading and Other Income) Bill

Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 9 — Gains from contracts for life insurance etc.
235

535
Top slicing relief
(1)
An individual is entitled to relief under this section for a tax year if—
(a)
the individual’s liability for the tax year, as calculated under subsection
(3), exceeds
(b)
the individual’s relieved liability for the tax year, as calculated under—
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section 536 (top slicing relieved liability: one chargeable event), or
section 537 (top slicing relieved liability: two or more chargeable
events).
(2)
The relief is given by a reduction in or repayment of income tax equal to the
excess.
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(3)
An individual’s liability for a tax year for the purposes of subsection (1)(a)
equals TL — LRL, where—
TL is the amount of the individual’s total liability to income tax on income
charged to tax under this Chapter for the tax year, calculated on the
basis that no relief is available under this section and the highest part
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assumptions apply, and
LRL is the amount of income tax at the lower rate that the individual is
treated as having paid under section 530(1) for the tax year.
(4)
For the purposes of subsection (3) and sections 536 and 537, the highest part
assumptions, in calculating liability to income tax on an amount, are that—
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(a)
the amount is the highest part of the individual’s total income for the
tax year, and
(b)
any provision directing any other amount to be treated as the highest
part is ignored.
(5)
For the purposes of this section and sections 536 and 537, an individual’s total
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income is treated as not including any amount which—
(a)
is charged to tax under Chapter 4 of Part 3 (profits of property
businesses: lease premiums etc.) as the profits of a UK property
business, or
(b)
counts as employment income under section 403 of ITEPA 2003
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(payments and benefits on termination of employment etc.).
(6)
For the purposes of this section and sections 536 and 537—
(a)
any chargeable event under section 525(2) (chargeable events where
annual personal portfolio bond calculations show gains),
(b)
any gain treated as arising on the occurrence of such an event, and
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(c)
the amount of any liability to income tax arising on such a gain,

are ignored.
536
Top slicing relieved liability: one chargeable event
(1)
To calculate an individual’s relieved liability for the purposes of section 535(1)
for a tax year for which the individual is only liable for tax on a gain from one
40
chargeable event—

Step 1

Find the annual equivalent of the amount of that gain (“the annual equivalent”)
by dividing that amount by the number of complete years for which the policy
or contract has run before the chargeable event (“N”).
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See subsections (2) to (8) for further provisions about calculating N.

Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 9 — Gains from contracts for life insurance etc.
236


Step 2

Find the relieved liability on the annual equivalent by—
(a)
calculating the individual’s liability (if any) to income tax on the annual
equivalent, on the basis that—
(i)
the gain from the chargeable event is limited to the amount of
5
the annual equivalent, and
(ii)
the highest part assumptions apply, and
(b)
subtracting the amount of income tax at the lower rate on the annual
equivalent which the individual is treated as having paid under section
530(1).
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Step 3

Multiply the relieved liability on the annual equivalent by N.
(2)
In the case of a calculation event that is not the first calculation event in relation
to the policy or contract, for steps 1 and 3 in subsection (1) N is the number of
complete years since the previous such event (but see subsection (6)).
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(3)
For the purposes of subsection (2), part surrender or assignment events are
taken to occur at the end of the insurance year in which the surrender or
assignment occurs.
(4)
If, in a case where subsection (2) does not apply, the gain is from a policy of life
insurance which is a new policy in relation to another policy, for steps 1 and 3
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N is calculated from—
(a)
the issue of the other policy, or
(b)
if it also was a new policy in relation to an earlier policy, the issue of the
earlier policy,

and so on.
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(5)
In subsection (4) “new policy” has the meaning given in paragraph 17 of
Schedule 15 to ICTA.
(6)
Subsection (2) does not apply if the gain is from a foreign policy of life
insurance or a foreign capital redemption policy.
(7)
If the gain is from such a policy, for steps 1 and 3 in subsection (1) N is reduced
30
by the number of complete years during which the policy holder was non-UK
resident.
(8)
If subsections (4) and (7) both apply, subsection (7) applies to N as calculated
under subsection (4).
537
Top slicing relieved liability: two or more chargeable events
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To calculate an individual’s relieved liability for the purposes of section 535(1)
for a tax year for which the individual is liable for tax on gains from two or
more chargeable events—
Step 1
Calculate the total annual equivalent by adding together the annual
40
equivalents for each of the chargeable events, found as specified in step 1 in
section 536(1).
Step 2
Find the total relieved liability on the total annual equivalent by—
(a)
calculating the individual’s liability to income tax (if any) on the total
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annual equivalent, on the basis that—

Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 9 — Gains from contracts for life insurance etc.
237

(i)
the total gains from the chargeable events are limited to the
amount of the total annual equivalent, and
(ii)
the highest part assumptions apply, and
(b)
subtracting the amount of income tax at the lower rate on the total
annual equivalent which the individual is treated as having paid under
5
section 530(1).
Step 3
Multiply the total relieved liability on the total annual equivalent by the total
gains charged to tax under this Chapter for the tax year in respect of all the
events.
10
Step 4
Divide the result of step 3 by the total annual equivalent.
538
Recovery of tax from trustees
(1)
This section applies if—
(a)
immediately before a chargeable event the rights under the policy or
15
contract, or the part of or share in them in question, were held on non-
charitable trusts,
(b)
an individual is liable for tax under this Chapter for the tax year on the
gain from the event, and
(c)
the income tax for which the individual is liable for the tax year, after
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any relief available in respect of the gain under section 535 (top slicing
relief), exceeds that for which the individual would have been liable
apart from the event.
(2)
The individual is entitled to recover that excess from the trustees, subject to the
restriction specified in subsection (3).
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(3)
The amount recovered must not exceed the total of—
(a)
any sums received by the trustees because of the chargeable event, and
(b)
the value of any benefits so received.
(4)
If the individual’s relief under section 535 for the tax year does not relate only
to the gain from the event in question, for the purposes of subsection (1)(c) a
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proportionate part of that relief is taken to be relief in respect of that gain.
(5)
An individual may require the Inland Revenue to certify an amount
recoverable by the individual under this section.
(6)
Such a certificate is conclusive evidence of the amount.
Deficiencies
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539
Relief for deficiencies
(1)
A deficiency from a policy or contract arising on a chargeable event is
allowable as a deduction from an individual’s total income for a tax year if, had
a gain arisen instead on that event—
(a)
the individual would have been liable to income tax on the gain for that
40
year, or
(b)
the individual would have been so liable apart from the requirement in
section 465(1) that the individual must be UK resident in the tax year in
which the gain arises.

Income Tax (Trading and Other Income) Bill
Part 4 — Savings and investment income
Chapter 9 — Gains from contracts for life insurance etc.
238

(2)
See section 540 for the cases in which such a deficiency is treated as arising,
section 541 for how the deficiency is calculated and section 469(5) for the
apportionment of deficiencies in cases where two or more persons are
interested in a policy or contract.
(3)
Subsection (1) only applies for the purpose of determining the individual’s
5
extra liability.
(4)
For this purpose, an individual’s extra liability is the amount by which the
individual’s liability to income tax exceeds the amount it would be on the
assumptions specified in subsections (5) and (6).
(5)
It is assumed that income charged to tax at the higher rate is charged—
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(a)
in the case of income within section 1A(1A)(c) of ICTA (income charged
at the lower rate instead of the basic rate), at the lower rate, and
(b)
in any other case, at the basic rate.
(6)
It is assumed that income charged to tax at the dividend upper rate is charged
at the dividend ordinary rate.
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540
When deficiencies arise: events following calculation events
(1)
A deficiency is treated as arising from a policy or contract on a chargeable
event (“the later event”) if conditions A to C are met.
(2)
Condition A is that the later event is an event within section 484(1)(a)(i) or (iii)
or (b) to (e) (surrender of all rights, final participation in profits, death,
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maturity, or taking a capital sum as a complete alternative to annuity
payments).
(3)
Condition B is that a gain from the policy or contract has arisen on a calculation
event other than a personal portfolio bond event, occurring in relation to the
policy or contract in question before the later event.
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(4)
Condition C is that on the later event no gain is shown by the calculation in
section 491(2) (calculation of gains for such events).
541
Calculation of deficiencies
(1)
This section sets out how the amount of a deficiency treated as arising under
section 540(1) on a chargeable event (“the later event”) is calculated.
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(2)
If, when the calculation in section 491(2) is made for the later event, the total
allowable deductions equal or exceed the total benefit value, the amount of the
deficiency is equal to the total previous gains.
(3)
If, when that calculation is made, the total benefit value exceeds the total
allowable deductions, the amount of the deficiency is equal to the total
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previous gains, less that excess.
(4)
In this section “the total previous gains” means the total amount of gains that—
(a)
were treated as arising on calculation events (other than personal
portfolio bond events) occurring in relation to the policy or contract in
question before the later event, and
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(b)
formed part of the total income of the individual mentioned in section
539(1) for a tax year earlier than the tax year mentioned in that section.