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Clause 41: Allowances in year of death
162. This clause addresses the position if an individual dies in the tax year for which an allowance may be due. It is based on section 257(4) of ICTA.
163. Subsection (1) is new, but states what is implicit in the current legislation. The amount of the allowance for any tax year is not reduced on account of death, so that the full amount is due, even if death occurs on 6 April.
164. Subsections (2) and (3) provide that the age-related personal allowances are given for a tax year on the basis that an individual will reach 65 or 75 in that year and are not affected if death occurs before the relevant birthday.
Chapter 3: Tax reductions for married couples and civil partners
165. This Chapter provides for a tax reduction where a party to a marriage or civil partnership was born before 6 April 1935. It is based on sections 257A, 257AB, 257BA, 257BB and 278 of ICTA, as amended by the Tax and Civil Partnership Regulations 2005 (SI 2005/3229).
166. The residence requirement has been built into clauses 45 to 49 with no special provision for claims by non-UK residents to be made to the Commissioners for Her Majesty's Revenue and Customs. Claims to allowances are made to officers of Revenue and Customs, and no appeals are reserved to the Special Commissioners. This is achieved by not specifying to whom claims are to be made. See Change 5 in Annex 1.
167. A tax reduction is only due if the parties live together. The meaning of living together is in clause 945.
Clause 42: Tax reductions under Chapter
168. This clause explains where to find the rules about the relief for married couples and civil partners given as a reduction in terms of tax. It is new.
169. These reliefs are often known as married couple's allowances (the term referring to the amounts by reference to which the tax reductions are calculated).
170. Relief is available only if one spouse or civil partner was born before 6 April 1935.
171. The general rule in section 256(2)(b) of ICTA that prevents the tax reduction exceeding the liability is reflected in clause 29.
Clause 43: Meaning of "the minimum amount"
172. This clause specifies the minimum amount of the allowance by reference to which relief is given. It is based on sections 257A(5A) and 257AB(5) of ICTA.
173. The tax reduction for married couples and civil partners is a percentage of a specified amount known as the "married couple's allowance" (see clauses 45(3) and 46(3)). The allowance depends on the ages of the couple and the level of the claimant's income. But that amount cannot be reduced below a certain level which is given a new label "the minimum amount".
Clause 44: Election for new rules to apply
174. This clause defines, and provides rules about, elections for the rules introduced by the Tax and Civil Partnership Regulations 2005 to apply. It is based on section 257AB(8) of ICTA.
175. The new rules concern marriages taking place and civil partnerships formed on or after 5 December 2005. Existing marriages are not affected. But the husband and wife of an existing marriage may jointly elect for the new rules to apply. The main effect of an election is that the spouse with the higher income, rather than the husband, is the individual entitled to make the primary claim to relief.
Clause 45: Marriages before 5 December 2005
176. This clause applies if a marriage took place before 5 December 2005 unless an election for the new rules is in force. It is based on sections 256 and 257A of ICTA.
177. Subsection (1) provides that the husband may claim the relief and that if the conditions in subsection (2) are met he is entitled to a tax reduction. The amount of the tax reduction is 10% of the amount specified in subsection (3).
178. Subsection (4) provides that the allowance is reduced if the husband's adjusted net income exceeds a threshold. The calculation of adjusted net income for this purpose is similar to, but slightly more complicated than, that under clause 36(2) because it takes into account the fact that he will have already suffered a reduction in his personal allowance if he is aged 65 or over.
Clause 46: Marriages and civil partnerships on or after 5 December 2005
179. This clause applies if a marriage takes place or a civil partnership is formed on or after 5 December 2005, or if a married couple elect for the new rules to apply. It is based on sections 256 and 257AB of ICTA.
180. Where a same-sex couple registered their relationship in an overseas jurisdiction listed in Schedule 20 to the Civil Partnership Act 2004 before 5 December 2005 they are treated under that Act as having formed a civil partnership on 5 December 2005. According, in those circumstances a claim may be made under this clause.
181. Subsection (1) provides that on a valid claim a tax reduction is due to the individual who makes the claim. As is made clear in subsection (2), that individual is the spouse or civil partner with the higher income.
182. Subsection (2) sets out the conditions for the relief under this clause. The "higher income" test operates by reference to unrelieved total income. If, exceptionally, both parties have the same income, then they jointly nominate either party as the claimant.
183. Subsection (4) provides that the allowance is reduced if the claimant's adjusted net income exceeds a threshold. The calculation of adjusted net income for this purpose is similar to, but slightly more complicated than, that under clause 36(2) because it takes into account the fact that the individual will have already suffered a reduction in the personal allowance if the individual is aged 65 or over.
Clause 47: Election by individual to transfer relief under section 45 or 46
184. This clause allows an individual to claim a transfer of part of the relief available to that individual's spouse or civil partner. It is based on section 257BA(1) of ICTA.
185. The tax reduction is claimed by and given to the husband under clause 45, or to the party with the higher income under clause 46.
186. The transfer that can be made (from this primary claimant) to the wife or to the lower income party (as appropriate) is of a tax reduction calculated by reference to one half of the "the minimum amount" in clause 43.
187. Subsection (1) provides that the recipient is entitled to a tax reduction of 10% of one half of the minimum amount provided the primary claimant is entitled to a tax reduction, and the conditions in subsection (2) are met.
188. The procedure for making an election is set out in clause 50. In addition to the election, which remains in force until withdrawn, the spouse or civil partner must claim the tax reduction for a particular tax year.
189. Subsections (3) and (4) ensure that if a spouse or civil partner does receive a tax reduction under this clause then the primary claimant's tax reduction (calculated after any reduction attributable to income exceeding the threshold or due to marriage or entry into civil partnership in the year) is correspondingly reduced.
Clause 48: Joint election to transfer relief under section 45 or 46
190. This clause allows spouses or civil partners to make a joint claim for the transfer between them of the part of the relief attributable to the whole of the minimum amount. It is based on section 257BA(2) of ICTA.
Clause 49: Election for partial transfer back of relief
191. This clause provides that if a joint election has been made under clause 48, then the primary claimant may unilaterally elect to transfer back the tax reduction attributable to one half of the minimum amount. It is based on section 257BA(3) of ICTA.
192. This is in addition to that individual benefiting from any tax reduction attributable to the allowance in excess of the minimum that remained with that individual in the first place. The election remains in force until withdrawn and the procedure is set out in clause 50. The individual also has to make a claim for each tax year for which a transfer back is wanted.
Clause 50: Procedure for making and withdrawing elections under sections 47 to 49
193. This clause details the procedure for making elections for the transfer of relief to a spouse or civil partner and for the re-transfer of relief back and for the withdrawal of those elections. It is based on section 257BA(4), (5), (7) and (8) of ICTA.
194. Subsection (2) concerns the making of an election. The election must be in the form specified by the Commissioners for Her Majesty's Revenue and Customs, in accordance with paragraph 2(3) of Schedule 1A to TMA.
195. Subsection (3) sets out the two circumstances in which an election first takes effect in the year in which it is made rather than in the following year. Where "appropriate notice" is to be given, it must be in writing (see clause 923).
Clause 51: Transfer of unused relief
196. This clause provides for the transfer to a spouse or civil partner of so much the relief as cannot be used in calculating the primary claimant's liability to income tax. It is based on section 257BB(1), (2) and (3A) of ICTA.
197. In looking to see whether the claimant has unused relief, subsection (1) provides for a comparison to be made between that individual's tax reduction (including any tax reduction transferred back from the spouse or civil partner) and the individual's "comparable tax liability". The meaning of this new term is given in clause 53. The unused part of the total tax reduction under this Chapter is the amount eligible for transfer.
198. In order for this provision to apply the spouse or civil partner must be entitled to relief and the primary claimant must give notice that the transfer is to apply. These rules are contained in subsection (4).
Clause 52: Transfer back of unused relief
199. This clause is effectively the reverse of clause 51. It is based on section 257BB(3) and (3A) of ICTA.
200. It applies if a spouse or civil partner has claimed a tax reduction based on the whole or half of the "minimum amount", but cannot use that relief in full. In such a case, if that spouse or civil partner gives due notice, the excess relief goes back to the primary claimant.
Clause 53: Transfer of unused relief: general
201. This clause contains general provisions about transfers of unused relief. It is based on sections 256(2) and (3) and 257BB(1), (3) and (5) of ICTA.
202. In particular, the clause explains how an individual's "comparable tax liability" is determined in calculating whether there is excess relief eligible for transfer to a spouse or civil partner under clause 51 or 52.
203. Subsection (2) makes it clear that the comparison is made before deducting any double taxation relief. This ensures that any double taxation relief is given last.
204. Certain tax liabilities are "ring-fenced" so that they cannot be reduced by reliefs given by tax reductions. If an individual makes gift aid donations, the tax reduction under this Chapter may have to be restricted under the gift aid rules. This means that there is a greater reduction potentially available to transfer to the wife or civil partner. The same applies in reverse if the spouse or civil partner makes gift aid donations and there is a transfer back to the primary claimant. Subsection (3) ensures that these rules work as intended by restricting the amount that may be transferred.
Clause 54: Tax reductions in the year of marriage or entry into civil partnership
205. This clause provides rules that apply in the year of marriage or entry into civil partnership. It is based on sections 257A(6), 257AB(7) and 257BA(6) of ICTA.
206. Subsection (2) provides that in the year of marriage or entry into civil partnership, the allowance by reference to which the tax reduction is calculated is reduced by one twelfth for each complete month in the tax year prior to the marriage or civil partnership.
207. Subsection (3) makes it clear that the allowance to be reduced under this section is the allowance after it has been adjusted on account of the primary claimant's income exceeding the threshold.
208. Subsection (4) addresses the situation where an individual has been married or in a civil partnership in the tax year and remarries or enters into a new civil partnership.
209. It may be advantageous for the claim to be made for the later marriage or civil partnership rather than the earlier one even though the later one (but not the earlier one) will usually give rise to an adjustment under subsection (2).
210. The wording here makes it clear that the individual can choose to claim for the later marriage or civil partnership but that, if the claim is made for the marriage or civil partnership which existed at the start of the tax year, the individual will not suffer the adjustment under this section.
211. Subsection (5) ensures that if tax reductions based on the minimum amount are being transferred between spouses or civil partners, the minimum amount is also reduced by one twelfth for each complete month in the tax year prior to the marriage or civil partnership.
Clause 55: Sections 45 to 53: supplementary
212. This clause contains miscellaneous rules based on several source provisions.
213. Subsection (1) provides that an individual is entitled to only one tax reduction under clauses 45 to 48 in a tax year. It is based on sections 257A(6), 257AB(6) and 257BA(9) of ICTA.
214. Subsection (2) corresponds to the rule in clause 41(3) in relation to allowances under Chapter 2 that the higher level of relief under this Chapter is given for the tax year in which an individual will reach 75 and is not affected if death occurs before the 75th birthday. It is based on sections 257A(4) and 257AB(3) of ICTA.
215. Subsection (3) is new, but reflects the current law. It addresses the position where an individual dies and corresponds to the rule in clause 41(1). It is a clear statement that the amount of the relief is not reduced on account of death, so that the full amount is due, even if death occurs on 6 April.
Chapter 4: General
216. This Chapter contains the residence requirement for personal reliefs, provides for the indexation of allowances and income thresholds and makes provision about the determination of an individual's income in connection with the age-related allowances.
Clause 56: Residence etc of claimants
217. This clause provides details of residence conditions which have to be satisfied for personal reliefs to be available. It is based on section 278 of ICTA.
218. Subsection (1) provides that the clause applies in relation to personal allowances, blind person's allowance and tax reductions for married couples and civil partners. Clause 460 provides corresponding rules for certain other reliefs given in Chapter 6 of Part 8.
219. Subsection (2) provides that the requirements of this clause are met if the individual is UK resident or meets one of the alternative tests in subsection (3).
220. Residence is a concept that applies to a tax year so that an individual is either resident in or not resident in the United Kingdom for a complete tax year. But ESC A11 allows tax years to be split, and will continue to do so. Personal reliefs are given in full for any tax year in which a qualifying individual is resident in the United Kingdom whether or not the tax year is split under ESC A11.
221. Subsection (3) is based on section 278(2) of ICTA. If the individual is not UK resident then one of conditions (a) to (f) must be satisfied. The drafting makes it explicit that a test only has to be met at some time in the tax year. In rewriting section 278(2)(e) of ICTA it has been assumed that the word "employed" is implicit before the word "service".
222. Individuals who, under the source legislation, were able to claim the reliefs only by virtue of meeting the condition in section 278(2)(a) are catered for by provisions remaining in ICTA, as amended by this Bill. See the overview commentary on this Part.
Clause 57: Indexation of allowances
223. This clause provides for the annual indexation of allowances. It is based on sections 257C and 265(1A) of ICTA.
224. Subsection (1) lists all the amounts within Chapters 2 and 3 of this Part that are subject to indexation.
225. Subsections (2) to (4) set out how the increases due to indexation are to be calculated. The words "unless Parliament otherwise determines" in section 257C(1) have been omitted as it is always open to a Finance Bill to disapply this provision, so no express provision to this effect is needed.
226. Subsection (5) is an administrative provision to reflect the fact that it is usually only known at the time of the Chancellor's Budget speech whether statutory indexation will apply. This leaves insufficient time before the start of the tax year for employers to update their payroll systems. This rule gives employers until the first pay-day after 17 May to make the necessary changes.
227. Subsection (6) obliges the Treasury to specify the indexed amounts in a statutory instrument which must be made in the tax year before the tax year to which they are to apply.
Clause 58: Meaning of "adjusted net income"
228. This clause brings together the rules from several source provisions about calculating income for the purposes of the age-related personal allowances. It is based on section 835(5) of ICTA, section 25(9A) of FA 1990 and section 192(5) of FA 2004.
229. The starting point is the measure of an individual's net income as set out in Step 2 in clause 23. An individual's net income is determined before allowances under Chapter 2 of this Part are deducted. Section 835(5) of ICTA makes it clear that such allowances are not deducted in determining the income threshold for the purpose of sections 257(5) and 257A(5) of ICTA. Due to an oversight in the amendments made by the Tax and Civil Partnership Regulations 2005 (SI 2005/3229), the rule was not applied to the calculation of the income threshold in section 257AB(4) of ICTA. That oversight is corrected here. See Change 8 in Annex 1.
230. Subsection (1) makes a number of adjustments to the amount of net income.
231. Before FA 2000, covenanted donations to charities were charges on income. But section 41 of FA 2000 amended that rule so that charitable donations are no longer charges on income. In order that the measure of income used in the calculation of age-related personal allowances was not affected by this change, section 25(9A) of FA 1990 was inserted to ensure that charitable donations continued to reduce income for this purpose. Step 2 gives effect to this rule.
232. Under the gift aid rules the donor gives an amount (the net amount) which is grossed up at the basic rate of tax to provide a "grossed up amount". Step 2, together with subsection (2), make it clear that, as has always been understood, it is the gross amount that is to be deducted.
233. Step 3 together with subsection (3) provide for a deduction to be made from income for the gross amount of certain pension contributions paid under deduction of tax. This rule is based on section 192(5) of FA 2004.
234. Step 4 ensures that any relief given under clause 457 or 458 that has been deducted in arriving at net income is added back. That reflects section 835(5) of ICTA in relation to the income threshold in the age-related personal allowances and in married couple's allowance for marriages taking place before 5 December 2005. This provision applies the rule also to the calculation of the income threshold for marriages and civil partnerships entered into to on or after that date. See Change 8 in Annex 1.
Part 4: Loss relief
235. This Part contains rules relating to various reliefs for losses that are deducted in calculating net income (see step 2 of clause 23). It is based on sections 117 to 118ZO and Chapter 1 of Part 10 (sections 379A to 392) of ICTA.
236. The reliefs are set out in separate Chapters following (so far as relevant) the order in which the types of income concerned are set out in ITTOIA.
Chapter 1: Introduction
Clause 59: Overview of Part
237. This clause provides an overview of the Part. It is new.
238. Subsection (2) provides that the Part is to be read with Chapter 3 of Part 2. In particular that Chapter provides rules about the order in which different reliefs are deducted in calculating net income.
239. Subsection (3) provides a signpost to rules about the calculation of the amount of losses, for which relief may be available under this Part.
Chapter 2: Trade losses
240. This Chapter provides relief for trading losses.
Clause 60: Overview of Chapter
241. This clause provides an overview of the Chapter. It is new.
242. Subsection (1) lists the various reliefs available for trade losses and certain restrictions on the reliefs.
243. Subsection (2) provides a signpost to Schedule 1B of TMA. Schedule 1B gives rules for the mechanics where there is a claim that relief for losses of one tax year be given against income of an earlier tax year.
244. Subsection (3) provides a signpost to provisions which treat an individual as starting or permanently ceasing to carry on a trade, profession or vocation in certain circumstances. It is based on section 384(4) of ICTA.
245. Subsection (4) introduces a label ("sideways relief") for the two reliefs that allow trading losses for a tax year to be set against other income arising in the same tax year or an earlier tax year.
Clause 61: Non-partners: losses of a tax year
246. This clause provides that references to losses made in a tax year means losses made in the basis period for the tax year. It is based on sections 382(3) and 385(1) of ICTA.
Clause 62: Partners: losses of a tax year etc
247. This clause sets out certain rules that apply if the losses are made by a person who is a partner and provides signposts to the relevant provisions in ITTOIA. It is based on sections 110(1A), 118ZE(5) and (6), 382(3), 385(1) and 389(4) of ICTA.
Clause 63: Prohibition against double counting
248. This clause ensures relief is only given once for a particular loss or part of a loss. It is based on sections 380(1), 381(3), 385(7), 388(2), 504A(5) of ICTA and section 72(2) of FA 1991.
249. This clause does not reproduce the rule in section 382(4) of ICTA that an amount of a loss of a trade, which would otherwise be included in calculations for two successive years, is not to be included in the calculation for the second of those years. That rule is covered by section 206 of ITTOIA, to which clause 61(5) provides a signpost.
Clause 64: Deduction of losses from general income
250. This clause provides for trade loss relief against general income. It is based on section 380(1) of ICTA.
251. "Trade loss relief against general income" is a descriptive label for the relief covered by this clause; the words "general income" are not used in Chapter 3 of Part 2 (calculation of income tax liability).
252. The clause makes explicit what is only implicit in section 380(1) of ICTA:
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