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 5 — Miscellaneous income
Chapter 6 — Beneficiaries’ income from estates in administration
285

(4)
Income treated as arising as a result of this section is estate income for the
purposes of this Chapter.
653
Meaning of “the administration period” and “the final tax year”
(1)
In this Chapter “the administration period”, in relation to the estate of a
deceased person, means the period beginning with the deceased’s death and
5
ending with the completion of the administration of the estate.
(2)
In the application of subsection (1) to Scotland, the reference to the completion
of the administration is to be taken as a reference to the date at which, after
discharge of, or provision for, liabilities falling to be met out of the deceased’s
estate, the free balance held in trust for the residuary legatees or for the persons
10
with the right to the intestate estate has been ascertained.
(3)
In this Chapter “the final tax year” means the tax year in which the
administration period ends.
654
Estate income: limited interests in residue
(1)
Income is treated as arising in a tax year from a person’s limited interest in the
15
whole or part of the residue of an estate in cases A, B and C.
(2)
Case A is where—
(a)
the interest has not ceased before the beginning of the tax year, and
(b)
a sum is paid in respect of the interest in that year and before the end of
the administration period.
20
(3)
Case B is where—
(a)
the tax year is the final tax year,
(b)
the interest has not ceased before the beginning of that year, and
(c)
a sum remains payable in respect of the interest at the end of the
administration period.
25
(4)
Case C is where—
(a)
the tax year is a year before the final tax year,
(b)
the interest ceases in the tax year, and
(c)
a sum is paid in respect of the interest in a later tax year but before the
end of the administration period, or remains payable in respect of it at
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the end of that period.
(5)
This section does not apply to limited interests to which section 674 (successive
interests: holders of limited interests) applies.
(6)
Income treated as arising as a result of this section or section 674 is estate
income for the purposes of this Chapter.
35
655
Estate income: discretionary interests in residue
(1)
Income is treated as arising in a tax year from a person’s discretionary interest
in the whole or part of the residue of an estate if a payment is made in the tax
year in exercise of the discretion in that person’s favour.
(2)
Income treated as arising as a result of this section is estate income for the
40
purposes of this Chapter.

Income Tax (Trading and Other Income) Bill
Part 5 — Miscellaneous income
Chapter 6 — Beneficiaries’ income from estates in administration
286

Income charged and person liable
656
Income charged: UK estates
(1)
In the case of a UK estate, tax is charged under section 649 on the amount of
estate income treated as arising in the tax year.
(2)
That amount is the basic amount of that income for the tax year (see subsection
5
(4)) grossed up by reference to the applicable rate for that year (see section 663).
(3)
The gross amount is treated as having borne income tax at that rate.
(4)
In this Chapter “the basic amount”, in relation to estate income, has the
meaning given by—
(a)
section 660 (basic amount of estate income: absolute interests),
10
(b)
section 661 (basic amount of estate income: limited interests),
(c)
section 662 (basic amount of estate income: discretionary interests), and
(d)
section 675 (basic amount of estate income: successive limited
interests).
657
Income charged: foreign estates
15
(1)
In the case of a foreign estate, tax is charged under section 649 on the full
amount of estate income treated as arising in the tax year.
(2)
That amount depends on whether the estate income arising in the tax year is
paid from sums within section 680(3) or (4) (sums treated as bearing income
tax).
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(3)
So far as the estate income is paid from such sums, that amount is the basic
amount of that income for the tax year grossed up by reference to the
applicable rate for that year (see section 663).
(4)
That gross amount is treated as having borne income tax at that rate.
(5)
So far as the estate income is not paid from sums within section 680(3) or (4),
25
the amount of estate income treated as arising in the tax year is the basic
amount of that income for that year.
658
Special rules for foreign income
(1)
The charge to tax under section 649 on the amount of income arising in a tax
year is subject to Part 8 (foreign income: special rules).
30
(2)
For the purposes of section 830(1) (meaning of “relevant foreign income”)
amounts charged to tax under section 649—
(a)
are treated as arising from a source outside the United Kingdom if the
estate is a foreign estate, and
(b)
are treated as not arising from such a source if the estate is a UK estate.
35
659
Person liable
(1)
If the estate income is from a person’s absolute interest or limited interest, that
person is liable for any tax charged under section 649 unless subsection (3) or
(4) provides that another person is liable.

Income Tax (Trading and Other Income) Bill
Part 5 — Miscellaneous income
Chapter 6 — Beneficiaries’ income from estates in administration
287

(2)
If the estate income is from a discretionary interest, the person in whose favour
the discretion is exercised in making the payment in question is liable for any
tax charged under section 649.
(3)
If, in a case where the estate income is from an absolute interest—
(a)
section 671 (successive absolute interests) applies, or
5
(b)
section 672 (successive interests: assumed income entitlement of holder
of absolute interest following limited interest) applies and the income
is treated as arising because of that section,

the person by reference to whose assumed income entitlement the estate
income is determined is liable for any tax charged under section 649.
10
(4)
If, in a case where the estate income is from a limited interest—
(a)
section 673(1) applies and the income is treated as arising because of
section 673(2) (payment in respect of a previous limited interest), or
(b)
section 674 (successive interests: holders of limited interests) applies,

the person entitled to receive the payment in question is liable for any tax
15
charged under section 649.
Basic amount of estate income: general calculation rules
660
Basic amount of estate income: absolute interests
(1)
The basic amount of estate income relating to a person’s absolute interest in the
whole or part of the residue of an estate for a tax year before the final tax year
20
is the lower of—
(a)
the total of all sums paid in the tax year in respect of that interest, and
(b)
the amount of the person’s assumed income entitlement for the tax year
in respect of it.
(2)
The basic amount for the final tax year is equal to the amount of the person’s
25
assumed income entitlement for that year in respect of that interest.
(3)
But if the residuary income of the estate for the final tax year is nil because the
allowable estate deductions exceed the aggregate income of the estate, the
basic amount for that year is reduced—
(a)
where the person has an absolute interest in the whole of the residue of
30
the estate, by an amount equal to the excess, and
(b)
in any other case, by an amount equal to such part of the excess as is just
and reasonable.
(4)
See sections 665 to 670 for the meaning of references to assumed income
entitlement and residuary income of an estate.
35
(5)
See sections 664 and 666(2) for the meaning of aggregate income of an estate
and allowable estate deductions respectively.
(6)
This section is subject to sections 671 to 673 (successive interests).
661
Basic amount of estate income: limited interests
(1)
The basic amount of estate income relating to a person’s limited interest in the
40
whole or part of the residue of an estate for a tax year is the total of the sums
within section 654(2)(b), (3)(c) and (4)(c) for that year.

Income Tax (Trading and Other Income) Bill
Part 5 — Miscellaneous income
Chapter 6 — Beneficiaries’ income from estates in administration
288

(2)
This does not apply, and section 675 applies instead, if the limited interest is
one to which section 674 (successive interests: holders of limited interests)
applies.
662
Basic amount of estate income: discretionary interests
The basic amount of estate income relating to a person’s discretionary interest
5
in the whole or part of the residue of an estate for a tax year is the total of the
payments made in the tax year in exercise of the discretion in favour of the
person.
663
The applicable rate for grossing up basic amounts of estate income
(1)
The applicable rate by reference to which a basic amount of estate income is
10
grossed up for the purposes of sections 656 and 657 depends on the rate at
which income tax is borne for the tax year by the aggregate income of the
estate.
(2)
If the aggregate income of the estate all bears income tax at the same rate, the
applicable rate is that rate.
15
(3)
If—
(a)
different parts of the aggregate income of the estate bear income tax at
different rates, and
(b)
the same rate applies to all the income from which section 679 treats the
basic amount as having been paid,
20

the applicable rate is that rate.
(4)
If—
(a)
different parts of the aggregate income of the estate bear income tax at
different rates, and
(b)
different rates apply to different parts of the income from which section
25
679 treats the basic amount as having been paid,

each of those rates is the applicable rate by reference to which the
corresponding part of the basic amount is grossed up.
664
The aggregate income of the estate
(1)
For the purposes of this Chapter the aggregate income of the estate for a tax
30
year is the total of the income and amounts specified in subsection (2), but
excluding the income specified in subsection (5).
(2)
The income and amounts are—
(a)
the income of the deceased’s personal representatives in that capacity
which is charged to United Kingdom income tax for the tax year,
35
(b)
the income of the deceased’s personal representatives in that capacity
on which such tax would have been charged for the tax year if—
(i)
it was income of a UK resident who was ordinarily UK resident,
and
(ii)
it was income from a source in the United Kingdom,
40
(c)
any amount of income treated as arising to the personal representatives
under section 410(4) (stock dividends) that would be charged to income
tax under Chapter 5 of Part 4 if income arising to personal
representatives were so charged (see section 411),

Income Tax (Trading and Other Income) Bill
Part 5 — Miscellaneous income
Chapter 6 — Beneficiaries’ income from estates in administration
289

(d)
in a case where section 419(2) applies (release of loans to participator in
close company: loans and advances to persons who die), the amount
that would be charged to income tax under Chapter 6 of Part 4 apart
from that section, and
(e)
any amount that would have been treated as income of the personal
5
representatives in that capacity under section 466 if the condition in
section 466(2) had been met (gains from contracts for life insurance).
(3)
In calculating the amount of the income within subsection (2)(a), any allowable
deductions are to be taken into account.
(4)
In calculating the amount of the income within subsection (2)(b), any
10
deductions which would be allowable if the income had been charged to
United Kingdom income tax are to be deducted from the full amount of the
income actually arising in the tax year.
(5)
The excluded income is—
(a)
income to which any person is or may become entitled under a specific
15
disposition, and
(b)
income from property devolving on the personal representatives
otherwise than as assets for payment of the deceased’s debts.
(6)
In subsection (5)(a) “specific disposition” means a gift of specific property
under a will, including—
20
(a)
the disposition of personal chattels by section 46 of the Administration
of Estates Act 1925 (c. 23) (succession on intestacy), and
(b)
any disposition which under the law of another country has a similar
effect to a gift of specific property by will under the law of England and
Wales,
25

but excluding real property included in a residuary gift made by will by a
specific or general description of it or, in Scotland, heritable estate included in
such a gift.
Further provisions for calculating estate income relating to absolute interests
665
Assumed income entitlement
30
(1)
Whether a person has an assumed income entitlement for a tax year in respect
of an absolute interest in the whole or part of the residue of an estate depends
on the results of the following steps.

Step 1

Find the amount of the person’s share of the residuary income of the estate that
35
is attributable to that interest for that tax year and each previous tax year
during which the person had that interest (see sections 666 to 669).

Step 2

If the estate is a UK estate in relation to any tax year for which an amount has
been found under step 1, deduct from that amount income tax on that amount
40
at the applicable rate for that year (see section 670).

Step 3

Add together the amounts found under step 1 after making any deductions
necessary under step 2.

Step 4
45

Income Tax (Trading and Other Income) Bill
Part 5 — Miscellaneous income
Chapter 6 — Beneficiaries’ income from estates in administration
290


Add together the basic amounts relating to the person’s absolute interest in
respect of which the person was liable for income tax for all previous tax years
(or would have been so liable if the person had been a person liable for income
tax for those years).
(2)
For the purposes of this Chapter the person has an assumed income
5
entitlement for the tax year if the amount resulting from step 3 exceeds the
amount resulting from step 4.
(3)
The assumed income entitlement is equal to the excess.
(4)
This section is subject to—
section 671 (successive absolute interests), and
10
section 672 (successive interests: assumed income entitlement of holder of
absolute interest following limited interest).
666
The residuary income of the estate
(1)
For the purposes of this Chapter the residuary income of an estate for a tax year
is the aggregate income of the estate for that year, less the allowable estate
15
deductions for that year.

This is subject to section 669 (reduction in residuary income: inheritance tax on
accrued income).
(2)
The allowable estate deductions for a tax year are—
(a)
all interest paid in that year by the personal representatives in that
20
capacity (but see section 233 of IHTA 1984: exclusion of interest on
unpaid inheritance tax),
(b)
all annual payments for that year which are properly payable out of
residue,
(c)
all payments made in that year in respect of expenses incurred by the
25
personal representatives in that capacity in the management of the
assets of the estate, and
(d)
any excess deductions from the previous tax year.

This is subject to subsections (3) to (5).
(3)
No sum is to be treated as an allowable estate deduction if it is allowable in
30
calculating the aggregate income of the estate.
(4)
No sum is to be counted twice as an allowable estate deduction.
(5)
Payments in respect of expenses are only allowable estate deductions if they
are properly chargeable to income (ignoring any specific direction in a will).
(6)
In this section “excess deductions from the previous tax year” means so much
35
of the allowable deductions for the previous tax year as exceeded the aggregate
income of the estate for that year.
667
Shares of residuary income of estate
(1)
In the case of a person who has an absolute interest in the whole of the residue
of an estate for a whole tax year, the person’s share of the residuary income of
40
the estate in respect of that interest for that year is equal to the whole of that
income for that year.
(2)
In the case of a person who—

Income Tax (Trading and Other Income) Bill
Part 5 — Miscellaneous income
Chapter 6 — Beneficiaries’ income from estates in administration
291

(a)
has an absolute interest in the whole of the residue of an estate for part
of the tax year, or
(b)
an absolute interest in part of the residue of an estate for the whole or
part of the tax year,

the person’s share of the residuary income of the estate is a proportionate part
5
of that income for that year.
(3)
This section is subject to section 668 (reduction in share of residuary income of
estate).
668
Reduction in share of residuary income of estate
(1)
This section applies if a person has an absolute interest in the whole or part of
10
the residue of an estate at the end of the administration period and—
(a)
the total of the person’s shares of the residuary income of the estate in
respect of that interest for all tax years (apart from this section), exceeds
(b)
the total of all sums paid during or payable at the end of the
administration period in respect of that interest to any person (grossed
15
up where subsection (5) applies).
(2)
In the final tax year the person’s share of the residuary income of the estate is
to be reduced by that excess.
(3)
If that excess is greater than the person’s share of that income for the final tax
year, that person’s share of that income for the previous tax year is to be
20
reduced, and so on.
(4)
If subsection (3) applies all necessary adjustments and repayments of income
tax are to be made.
(5)
For the purposes of calculating the total mentioned in subsection (1)(b)—
(a)
if the estate is a UK estate in relation to a tax year in which a sum is paid,
25
the sum is to be grossed up by reference to the basic rate for that year,
and
(b)
if the estate is a UK estate in relation to the final tax year, a sum payable
at the end of the administration period is to be grossed up by reference
to the basic rate for that year.
30
(6)
For the application of this section where two or more absolute interests in the
whole or the same part of the residue are held successively by different
persons, see section 671(5) and (6).
669
Reduction in residuary income: inheritance tax on accrued income
(1)
This section applies if on the death of a person (“D”) income which accrued
35
before D’s death (“pre-death income”) is taken into account both—
(a)
in determining the value of D’s estate for the purposes of inheritance
tax charged on D’s death, and
(b)
in calculating the residuary income of D’s estate for a tax year.
(2)
A reduction is made in the residuary income of D’s estate for that tax year in
40
ascertaining the extra liability, if any, of a person with an absolute interest in
the whole or part of the residue of D’s estate or any other estate to which that
residuary income is relevant.