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Clause 408: Replacement loans
1153. This clause makes provision for cases where a loan, interest on which would be eligible for relief under some provisions of this Chapter, is used in repaying another qualifying loan. It is based on section 363(4) of ICTA.
1154. Subsection (3) ensures that the two loans are treated as a single loan for the purposes of this Chapter. In order that this rule works correctly when looking at how the proceeds are applied, it is subject to subsection (5) under which references to the use of a loan are generally taken as referring to the use of the original loan.
1155. Subsection (4) makes it clear that any restriction under clause 406 (recovery of capital) applies if capital is recovered while the second loan is in place.
Clause 409: Business successions between partnerships
1156. This clause ensures continuity of relief in certain cases where, in law, a partnership is dissolved. It is based on ESC A43.
1157. Under section 362 of ICTA, relief for interest paid is only available for so long as the individual is a partner in the partnership in which the investment is made. In strictness, the admission or departure of a partner results in a new partnership, but it has never been the practice to refuse relief in these circumstances. Indeed, ESC A43 goes further and allows relief to continue when there is a partnership reconstruction involving a merger or demerger.
1158. Subsections (1) and (2) of this clause gives statutory effect to current practice and ESC A43 to the extent that they relate to partnership changes and reconstructions. See Change 75 in Annex 1.
1159. Subsection (3) builds into the clause the extended meaning of "member of a partnership" that is explained in Change 70 in Annex 1. See also the commentary on clause 399.
1160. ESC A43 also deals with other types of business successions including the incorporation of a partnership. These cases are addressed in clause 410.
Clause 410: Other business successions and reorganisations
1161. This clause ensures continuity of relief in certain cases where a partnership is incorporated into another of the business entities covered by this Chapter. It is based on ESC A43.
1162. Under each of the sections in the source legislation dealing with investments in (including loans to) qualifying business entities, relief for interest paid is only available for so long as the shares are held in or the loan is made to the original business entity. In the case where the investment is in a partnership, the individual must remain a partner in the partnership in which the investment is made.
1163. It follows that relief strictly ceases to be available if a partnership is incorporated into one of the other types of qualifying business entity or there is a reconstruction in which the individual's original shares are replaced by shares in a different qualifying business entity. This rule is relaxed by ESC A43 which allows relief to continue if this sort of business succession occurs. This clause legislates that part of ESC A43. See Change 75 in Annex 1 and the commentary on clause 409.
1164. This clause only applies to genuine business successions. It is not considered to apply if an investment in one entity is replaced by another investment within the same entity. An example is the conversion of convertible loan stock into ordinary shares.
Clause 411: Ineligibility of interest where business is occupation of commercial woodlands
1165. This clause rules out relief if certain of the business entities covered by this Chapter carry on the business of the commercial occupation of woodlands. It is based on paragraph 3 of Schedule 6 to FA 1988.
1166. The clause applies if the loan is invested in a close company, an employee-controlled company or a partnership, and excludes relief for what is in effect an investment into an entity carrying on a tax-exempt activity. This clause also provides rules that apply if only part of the business is the exempt activity.
Clause 412: Information
1167. This clause makes provision for the lender of a loan covered by this Chapter to provide information to the borrower on request. It is based on section 366 of ICTA.
1168. The source legislation requires the person claiming relief to submit to an officer of Revenue and Customs a written certificate from the lender containing details of the debt and interest. Under Self Assessment, such statements are not generally required. Such a certificate will only be required when an officer raises enquiries into the return or the claim. The provision has therefore been recast in terms of the claimant being able to obtain a certificate from the lender if he needs or wants to do so. Lenders will no longer need to issue certificates routinely.
Chapter 2: Gift aid
1169. This Chapter gives relief for some gifts of money by individuals to charities. It is based on section 25 of FA 1990, section 98 of FA 2002 and section 83 of FA 2004.
Clause 413: Overview of Chapter
1170. This clause provides an overview of the Chapter. It is new.
1171. Subsection (2) points to clause 414, which sets out how the relief works.
1172. Under clause 414(2)(a), the gift is treated as paid after deduction of income tax. If the tax treated as deducted from the gift is greater than the income tax and capital gains tax to which the individual is liable, the excess is recovered. Under these rules, signposted by subsection (3):
1173. The position of the charity receiving the gift is not addressed in this Chapter. The rules about charitable trusts are in Part 10 of this Bill. The rules about charitable companies remain in the source legislation, as indicated by subsection (5).
Clause 414: Relief for gifts to charity
1174. This clause sets out the relief. It is based on section 25(6) of FA 1990.
1175. Subsection (1) sets out the basic requirement for the relief, which is that the gift should be a "qualifying donation" (see clause 416).
1176. Subsection (2)(b) provides that the individual's basic rate limit is increased by the amount of the gift grossed up at the basic rate of income tax. As a result, an amount of income up to that amount is taxed at either the dividend ordinary rate, the savings rate or the basic rate, rather than at the higher rate or the dividend upper rate.
1177. If "top slicing relief" is claimed on gains under life assurance policies etc (sections 535 to 537 of ITTOIA), relief under this Chapter is ignored for the purposes of the computations required by section 535(1) of ITTOIA. See section 535(7) of ITTOIA, inserted by Schedule 1 to this Bill.
Clause 415: Meaning of "grossed up amount"
1178. This clause provides the meaning of references to "the grossed up amount" of a gift. It is based on section 25(12)(d) of FA 1990.
Clause 416: Meaning of "qualifying donation"
1179. This clause sets out the meaning of "qualifying donation". It is based on section 25(1) and (2) of FA 1990.
1180. Condition C excludes the possibility of a double claim for relief under these provisions and also under the payroll deduction scheme.
1181. Condition D enacts the principle that, to be a qualifying donation, the payment must not also be deductible in arriving at the individual donor's income from any source. See Change 76 in Annex 1.
1182. Condition E denies relief if the donor, or any person associated with the donor, disposes of any property to the charity for any consideration. This prevents any overlap between this relief and the relief for gifts of assets in Chapter 3 of this Part.
Clause 417: Meaning of "benefits associated with a gift"
1183. This clause defines what is meant by one or more benefits being "associated with" a gift. It is based on section 25(2) and (4) of FA 1990.
Clause 418: Restrictions on associated benefits
1184. This clause sets out two conditions which, if either is met, mean that the restrictions on benefits associated with a gift are breached (condition F of clause 416). It is based on section 25(2), (4), (5) and (5A) of FA 1990.
1185. The two conditions are:
1186. Both these restrictions apply to any benefit "associated with" a gift. Clauses 420 and 421 remove certain benefits consisting of admission rights from the application of both restrictions.
Clause 419: Gifts and benefits linked to periods of less than 12 months
1187. This clause modifies the application of clause 418(2) where gifts or benefits are linked to periods of less than 12 months. It is based on section 25(5B) to (5D) of FA 1990.
1188. The clause provides, according to the case, for annualising:
1189. Only the annualised amount in each case is to be compared with the cash limits given in clause 418(2). This prevents periods of less than 12 months being used to exploit the cash limits.
1190. Subsection (8) states the formula for annualising in each case. In the source legislation some of the conditions in the clause could overlap, so that more than one condition could apply to the gift(s) and associated benefit(s) concerned. A priority rule is, therefore, provided. See Change 77 in Annex 1.
Clause 420: Disregard of certain admission rights
1191. This clause ensures that a benefit consisting of a relevant admission right is ignored for the purposes of the Chapter, so that a donation to a charity with which such a benefit is associated may be a qualifying donation regardless of the value of the benefit. It is based on section 25(5E) to (5I) of FA 1990.
1192. Condition B contains no general qualification relating to the purposes of the recipient charity. But property, as defined in subsection (6), must be preserved, maintained, kept or created by the charity for those charitable purposes.
1193. In Condition C (further provisions about which are in clause 421(2) to (4)), the right of admission must apply for at least a year whenever admission is available to members of the public who have not made such a gift.
1194. But in Condition D there is no time period. For the meaning of the "same right of admission" see clause 421(5).
Clause 421: Admission rights: supplementary
1195. This clause provides supplementary material about Conditions C and D in clause 420. It is based on section 25(5I) and (5J) of FA 1990.
1196. Subsections (2) to (4) deal with cases when event days could be held to interrupt the availability of a right of admission, reducing it to a period of less than 12 months and thus breaching Condition C. The applicable period is not regarded as broken if there are no more than five event days in it.
Clause 422: Disqualified overseas gifts
1197. This clause provides the rules for Condition G in clause 416(8). It is based on section 25(2) of FA 1990.
1198. In addition to the other conditions for a qualifying donation in clauses 416 to 421, this clause imposes a specific test that must be met in the case of a gift (an "overseas gift") made by a donor who is neither UK resident nor in Crown employment.
1199. The source legislation provides that, for the gift to be a qualifying donation, its grossed up amount would, if paid, be "payable out of profits or gains brought into charge to income tax or capital gains tax". This is rewritten as a reference to the gift being disqualified if it results in the sum of the grossed up amounts of any overseas gifts being more than the individual's charged amount (see clause 427) for the tax year. This is in keeping with the approach adopted towards the parallel rule in the source legislation for charges on income in its application to individuals (see Change 81 in Annex 1 and the commentary on clause 425).
Clause 423: Restriction of certain reliefs
1200. This clause restricts certain reliefs, where necessary to ensure that the individual pays enough tax to match any tax which might be refunded to the charities receiving the gifts. It is based on section 25(6)(c) of FA 1990.
1201. The clause operates if the amount of income tax treated as deducted from an individual's gifts, "amount A" in subsection (2), is greater than "amount B".
1202. The source legislation does not expressly say how "amount B" is to be calculated. This clause makes clear that the only difference between "amount B" (from section 25(6)(c) of FA 1990) and "amount C" in clause 424 (from section 25(9) of that Act) is that "amount B" is calculated before any restriction of personal reliefs under this clause. See Change 78 in Annex 1 and the commentary on clause 425.
1203. So "amount B" is:
1204. Section 25(6)(b) and (7) of FA 1990 are not rewritten. These provisions relate to certain of the tax reductions listed in clause 27(5) of this Bill. The effect of the relevant provisions in section 25(6)(b) and (7) of FA 1990 is achieved by the operation of clauses 23 and 425(2) of this Bill.
1205. The reliefs listed in subsection (5) are to be reduced only to the extent necessary. If all such available reliefs are extinguished and the liability still falls short of amount A, a charge to income tax arises under clause 424.
Clause 424: Charge to tax
1206. This clause operates to charge the donor with income tax in the amount of any remaining shortfall after the operation of clause 423. It is based on section 25(8) of FA 1990.
1207. Instead of "amount B" as in clause 423, the comparison is now with "amount C", which is the tax liability after applying clause 423. That liability includes the income tax liability as adjusted in accordance with clause 425.
1208. The charging provision operates directly in terms of an amount of tax, rather than (as in the source legislation) by way of charging an amount of deemed income.
Clause 425: Total amount of income tax to which individual charged for a tax year
1209. This clause provides for the adjustments to the individual donor's income tax liability in order to arrive at "amount B" in clause 423 and "amount C" in clause 424. It is based on section 25(9) of FA 1990.
1210. As part of the clarification of how these amounts are calculated, section 25(9)(c) of FA 1990 has been dropped as anomalous. See Change 78 in Annex 1 and the commentary on clause 423.
1211. Section 25(9)(a) of FA 1990 is not rewritten. That provision dealt with tax charged at the basic rate by virtue of sections 348 or 349 of ICTA. As a result of the new approach to charges on income such tax is no longer dealt with as part of a person's liability. See Change 81 in Annex 1.
Clause 426: Election by donor: gift treated as made in previous tax year
1212. This clause provides that an individual may elect that a qualifying donation made in one tax year be treated as having been made in the preceding tax year ("year P"). It is based on section 98 of FA 2002.
1213. A test similar to that in clause 422 must be met in year P for an election to be valid. Because of the possibility that other qualifying donations will have been made in year P, and will not themselves have been carried back to "year P minus 1", the language in which the test is expressed differs slightly from that in clause 422. Hence the references to the "increased total of gifts".
1214. Subsection (4), concerning the increased total of gifts, also has to take into account the possibility that elections are made when a notice under section 8 of TMA has not been issued and there is no other legal duty to notify liability to tax or file a self-assessment return. In that case, instead of being included in the self-assessment return under section 42(2) of TMA, elections may be made otherwise (under Schedule 1A to TMA), which opens up the possibility of a number of elections being made in respect of separate donations in the same year.
1215. In the case of non-residents to whom clause 422 applies, if a donation does not meet the test set out in clause 422(3) in the tax year in which the gift is made, it cannot be carried back in this way. In such a case the donation would not be "qualifying" and so would fail the condition in subsection (1)(a) of this clause.
1216. An election must be made before the actual filing date of the self-assessment tax return for year P (if a self-assessment return is made for that year), and in any case before the normal self-assessment filing date for year P. The requirement in section 98(2) of FA 2002 that the election "be made by notice in writing to an officer of the Inland Revenue" is catered for by paragraph 2(1) of Schedule 1A to TMA.
1217. In all cases the charity is treated as receiving the donation, not in year P, but in the tax year of payment. It is in respect of the year of payment that the charity will, if appropriate, be entitled to an income tax repayment in respect of the donation.
Clause 427: Meaning of "charged amount"
1218. This clause provides the basic calculation rules to establish the individual's charged amount for the purposes of the tests in clauses 422 and 426. It is based on section 25(2) of FA 1990 and section 98(3) of FA 2002.
1219. The detailed rules for establishing the individual's modified net income are contained in clause 958 in Part 16, which defines this term (as used in subsection (2) of this clause) for this and certain other purposes. See the commentary on that clause.
1220. The basic rule is to add together the "modified net income" established under clause 958 and the amount on which the individual is chargeable to capital gains tax. This amount is then compared with the "overseas gifts total" in clause 422(4), or the "increased total of the gifts" in clause 426(4), as appropriate.
Clause 428: Meaning of "gift aid declaration"
1221. This clause provides the definition of "gift aid declaration" in clause 416(1)(b), and states the powers under which the Commissioners for Her Majesty's Revenue and Customs may make related regulations. It is based on section 25(3) and (3A) of FA 1990.
1222. The regulations currently in force for these provisions are:
Clause 429: Giving through self-assessment return
1223. This clause makes provision for individuals to require all or part of any tax repayment arising as a result of a self-assessment return to be paid to a listed charity. It is based on section 83 of FA 2004.
1224. For the effect of this provision where the gift is received by a charitable trust, see clause 538(3) and the commentary on that clause.
Clause 430: "Charity" to include exempt bodies
1225. This clause provides that the bodies mentioned in subsection (1) are to be treated as charities for the purposes of this Chapter. It is based on section 507(1) of ICTA, section 25(12) of FA 1990 and paragraph 9 of Schedule 18 to FA 2002.
1226. References to the Trustees of the British Museum and of the Natural History Museum appear in section 507(1) of ICTA along with the other three bodies named in subsection (1)(a) to (c) of this clause. Section 507 gives exemption to all the bodies named there from corporation tax in line with the exemptions afforded to charities under section 505 of ICTA.
1227. By contrast, the ability to receive gift aid donations is given to any charity if the purposes for which it is established are fully charitable. In the case of the British Museum and the Natural History Museum this is so: see the relevant sections of the British Museum Act 1963. But in the other cases it is more doubtful whether their functions as set out in their foundation Acts are solely charitable. So it is only the names of those bodies which are included in this clause. See Change 79 in Annex 1.
1228. Similar provisions apply in the case of gifts of shares, securities and land to charities: see clause 446 in Chapter 3 of this Part.
Chapter 3: Gifts of shares, securities and real property to charities etc
1229. This Chapter gives relief to individuals making gifts of shares, securities and real property to charities, or disposing of such assets to charities at an undervalue. It is based on sections 587B and 587C of ICTA 1988.
Clause 431: Relief for gifts of shares, securities and real property to charities etc
1230. This clause sets out the relief. It is based on section 587B(1) and (2) of ICTA.
1231. Subsection (1) provides that relief is available if an individual disposes of the whole of the beneficial interest in a qualifying investment to a charity and makes a claim. The rule in section 587B(2) of ICTA that the claim must "be made to an officer of the Inland Revenue" is catered for by paragraph 2(1) of Schedule 1A to TMA.
1232. Subsection (2) provides that relief for the "relievable amount" is given as a deduction in calculating net income.
1233. If "top slicing relief" is claimed on gains under life assurance policies etc (sections 535 to 537 of ITTOIA), relief under this Chapter for is ignored for the purposes of the computations required by section 535(1) of ITTOIA. See section 535(7) of ITTOIA, inserted by Schedule 1 to this Bill.
Clause 432: Meaning of "qualifying investment"
1234. This clause lists the types of investment that can attract relief. It is based on section 587B(9) of ICTA.
Clause 433: Meaning of "qualifying interest in land"
1235. This clause defines "qualifying interest in land". It is based on section 587B(9A) to (9E) of ICTA.
1236. Subsections (2) and (3) clarify the position where an individual with a beneficial interest in an estate in land gives that beneficial interest to a charity along with any easement, servitude or right that benefits the land. For example, A's land may only be accessible by way of an easement over B's land. If A gives the charity both the land and the right over B's land, the disposal of the right is treated as a separate disposal.
1237. If an individual with a freehold or leasehold interest carves out of that interest a lease for the benefit of the charity, the retention of a freehold or leasehold reversion will not prevent the disposal from being "of the whole of the beneficial interest". But an agreement to acquire a freehold, or an agreement for a lease, is not enough to constitute a disposal.
Clause 434: The relievable amount
1238. This clause sets out how to calculate the relievable amount, firstly in cases where the qualifying investment is transferred to the charity by way of gift (subsection (1)), and then where there is consideration for the transfer (subsection (2)). It is based on section 587B(4) to (7) of ICTA.
1239. In each case, the computation starts with the value of the net benefit to the charity (V), either directly (as in subsection (1)) or in arriving at E (the excess of V over the consideration for the disposal) in subsection (2).
1240. The detail of how V is calculated is in clauses 437 to 440. But it is emphasised in the definition of V in subsection (1) that V must be considered both at, and immediately after, the time of the disposal.
1241. Subsection (3) makes it explicit that if the amount given by either formula is negative the relievable amount is nil.
1242. The treatment of incidental costs of disposal depends on whether the transfer is by way of gift or at an undervalue. If it is a gift, all the incidental costs are added in arriving at the relievable amount. But if there is consideration for the disposal, there is an interplay between the capital gains tax treatment and the incidental costs.
1243. Under section 257(2)(a) of TCGA a gift of a qualifying investment to a charity is treated as being for such a consideration as will result in neither a loss nor a gain to the donor. Incidental costs are added only if that deemed consideration is greater than the actual consideration. But the amount added must not be greater than that excess. C is defined (in subsection (4)) to achieve this result.
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