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2399. This clause explains the position where two or more absolute interests in the residue of an estate are held successively by different persons. It is based on sections 697(4) and (5), and 698(2) of ICTA. The corresponding rule for income tax is in section 671 of ITTOIA.
2400. Subsection (3) contains an ordering rule to ensure that all determinations under subsection (2) or clause 955(2) are made in relation to the person with the earlier interest before the person with the later interest. This subsection has been inserted to make explicit what is already implicit in the source legislation.
2401. Subsection (4) provides a special rule where there are two or more absolute interests in the final accounting period. It is intended to ensure that it is the last absolute interest which is charged to tax on the assumed income entitlement, which will comprise all the residuary income, in the final accounting period. This is because the last absolute interest holder will receive the capital of the residue (and also all outstanding income in respect of it).
2402. Subsections (5) and (6) contain special rules where clause 951 (reduction in share of residuary income of estate) applies and there are successive absolute interests. These subsections provide that the calculation under clause 951(1)(a) and (b) is to be made by reference to all the absolute interests taken together. Then, after applying the reduction to the last absolute interest under clause 951(2) and (3), any remaining excess is applied to the previous absolute interest holders working backwards from the beginning of the last interest. See Change 73 in Annex 1.
2403. This clause and clause 956 explain the position of the absolute interest holder where successive limited and absolute interests in the residue of an estate are held by different persons. It is based on section 698(1A) and (1B) of ICTA. The corresponding rule for income tax is in section 672 of ITTOIA.
2404. The clause applies only where the later interests arise or are created on the cessation of the previous interest otherwise than by death. The position of limited interests which cease on the death of the holder before the final tax year are dealt with in section 654 of ITTOIA and clause 939 of this Bill. All sums paid or remaining payable in respect of that interest after the tax year of death are treated as estate income arising in the tax year of death.
2405. Examples of situations, in relation to limited interests, that are covered by the clause include:
2406. Subsections (3) and (4) contain the two rules introduced by subsection (2). They deal with the limited interest which ceases otherwise than on death. They also explain how such an interest is brought into the calculation of whether the person with the absolute interest has an assumed income entitlement and, if so, its amount. The assumed income entitlement works on a cumulative basis, so the share of the residuary income of the absolute interest holder and the basic amounts of previous accounting periods are taken into account.
2407. This clause covers the position where the absolute interest holder is entitled to receive payments in respect of a preceding limited interest which has ceased otherwise than on death. It is based on section 698(1A) and (1B) of ICTA. The corresponding rule for income tax is in section 673 of ITTOIA.
2408. Subsection (2) deals with such payments while the absolute interest holder still has the absolute interest. It provides that a payment made to the absolute interest holder in respect of the limited interest is treated as paid in respect of the absolute interest (and not the limited interest). Thus, such payments may form part of the basic amount of estate income in accounting periods before the final accounting period.
2409. Subsection (3) deals with the position where the holders absolute interest has itself ceased (but the administration period continues). The approach here is to treat any such sum paid in these circumstances as a payment in respect of the earlier limited interest. The result is that such payments are treated as estate income under the limited interests provisions. But subsection (6) provides that the payments are treated as paid or payable in respect of the absolute interest for the purposes of clause 951 (reduction in share of residuary income of estate).
2410. The taxation of successive interests in the residue of an estate is dealt with in section 698(1A) to (2) of ICTA. Section 698(1B) of ICTA deals with the case where there were successive interests in an estate which ceased otherwise than on death and the earliest or one of the earlier interests was a limited interest (see section 698(1A) of ICTA).
2411. Section 698(1B)(a) of ICTA provides that Part 16 of ICTA applies as if all the interests were the same interest (the deemed single interest), so that none of them is to be treated as having ceased on being succeeded by any of the others. Section 698(1B)(b) of ICTA then determines who had the deemed single interest. It is either the person in respect of whose interest or previous interest the payment was made (section 698(1B)(b)(i) of ICTA) or a person who has or had an interest and is entitled to receive the payment (section 698(1B)(b)(ii) of ICTA). So a beneficiary who does not give up his or her entitlement to income which is unpaid at the time the interest ceases is taxable on the payment, rather than the person holding the successive interest at the time when the payment is made. However, section 698(1B)(b) of ICTA is made subject to section 698(1B)(c) of ICTA. Section 698(1B)(c)(i) of ICTA provides that, so far as a later interest is an absolute interest, it is to be treated as having always existed and the earlier interest or interests as having never existed for the purposes of the provisions dealing with absolute interests in section 696(3A) to (5) of ICTA.
2412. In rare circumstances the later absolute interest may itself have ceased at the time the payment is made. For example, A has a limited interest which is succeeded by absolute interests held first by B and then by C, and a payment is received by B in respect of As earlier limited interest after Bs own interest has ceased but before the end of the administration period. As a result of section 698(1B)(b)(ii) of ICTA, Part 16 of ICTA applies to the payment as if B had the deemed single interest. So section 696(3) of ICTA deems the sum to be paid to B as income in the accounting period in which it is actually paid. That is an accounting period in which C had the absolute interest. Under section 698(1B)(c)(i) of ICTA for the purposes of section 696(3A) to (5) of ICTA, Part 16 of ICTA is to apply as if the later interest of C had always existed and the earlier interests had never existed. Section 698(1B)(c)(ii) and (iii) of ICTA then provides that sums paid as income in respect of the earlier interests are deemed to be sums paid in respect of the later interest of C.
2413. The relationship between these particular provisions, where the later interest has itself ceased at the time the payment is made but the administration period continues, is difficult to work out. It would seem that the payment in the above example should be taxed on B because of section 696(3) of ICTA. The payment is then brought into account when the payments made in respect of Cs interest are compared to its aggregated income entitlement (in making the final year calculation under section 696(5) of ICTA in respect of Cs interest to determine whether any amount should be treated as having been paid to C immediately before the end of the administration period). So although section 698(1A) and (1B) of ICTA operate in a very convoluted way in the above circumstances, the end result appears to be that B, the person with the absolute interest who receives the payment, is taxed on it, but it does not affect Bs aggregated income entitlement.
2414. In order to spell out how a payment made in these circumstances should be treated, subsections (3) and (4) of this clause provide that where such a payment is made, this Chapter applies as if the earlier limited interest had continued to subsist while the later absolute interest subsisted and had been held by the holder of the later absolute interest. The result is that payments to that holder are treated as estate income under the provisions about limited interests.
2415. Sums to which that holder is entitled that remain payable at the end of the administration period are treated in the same way. They will be basic amounts arising from the limited interest in the accounting period in which the absolute interest ceases and are dealt with by clauses 939 and 944. The effect of this on later absolute interests is then determined by the successive absolute interests provisions in clause 954. Under subsection (6) of this clause, however, these sums are to be treated as paid or payable in respect of the absolute interest for the purposes of the provisions about the reduction in shares of residuary income under clause 951.
2416. This clause explains the position of a limited interest holder where successive interests in the residue of an estate are held by different persons and the earlier, or if there are more than two, the earliest of the interests is a limited interest. It is based on sections 695(2) and (3) and 698(1A) and (1B) of ICTA. The corresponding rule for income tax is in section 674 of ITTOIA.
2417. The clause only applies where the later interests arise or are created on the cessation of the previous interest otherwise than by death.
2418. Subsections (3) to (5) cover three sets of circumstances described as cases where the estate income in respect of successive limited interests is treated as arising. The cases are the equivalent for successive limited interests of the three cases for single limited interests in clause 939. But the clause recognises that there may be more than one limited interest in the chain of succession, so references are made to one of the interests and subsection (5) refers to the last of the successive interests.
2419. There is also an additional sub-paragraph in each case providing that a limited holder (as defined) is entitled to receive the payment. This reflects the fact that the person who receives the payment in these circumstances is not always the person in respect of whose interest the payment is made. For example, on disclaiming a life interest, a beneficiary may also disclaim any entitlement to income accrued in respect of that interest but not yet paid.
2420. The clause does not make it explicit that a new chain of succession begins with the first limited interest (and a previous absolute interest is ignored) for the purposes of this provision. Nor does the clause make it explicit that two limited interests which are preceded by a limited interest which ceased on the death of the beneficiary are covered by the clause. These conclusions are implicit in this clause.
2421. This clause explains how to calculate the net amount of estate income for successive limited interests. It is based on sections 695(2) to (4) and 698(1A) and (1B) of ICTA. The corresponding rule for income tax is in section 675 of ITTOIA.
2422. The clause is the equivalent provision to clause 944 for limited interests that are not successive.
2423. This clause applies where successive interests apply to only part of the residue. In other words, the residuary estate is divided up and one or more of the successive interests provisions apply to a part or parts of that estate. It also applies where one of the interests covers the whole estate and the other interest covers part of it. It is new. The corresponding rule for income tax is in section 676 of ITTOIA. See Change 74 in Annex 1.
2424. In such circumstances, it is possible that a subsequent interest may not cover exactly the same part of the residuary estate as the interest which preceded it. For example, limited interest holders may give up half their interest, thus accelerating the interest of the absolute interest holder. Only half the share of the residuary income and half the net amounts of the limited interest holder would be needed for the calculation of whether the absolute interest holder has an assumed income entitlement in accordance with clause 955(2). The clause provides for just and reasonable apportionments to be made in these circumstances.
2425. This clause provides for relief if income, which has borne United Kingdom tax, arises to a company with an absolute interest in the residue of a foreign estate. It is based on section 696(7) of ICTA. The corresponding rule for income tax is in section 677 of ITTOIA.
2426. Subsection (2) contains the formula for calculating the relief where a claim is made. The labels in section 696(7)(a) and (b) of ICTA - the deemed income and the aggregate income respectively - were added as explanatory aids in the course of the ICTA consolidation. These labels are not retained.
2427. This clause provides for relief if income, which has borne United Kingdom tax, arises to a company with a limited or discretionary interest in the residue of a foreign estate. The clause is based on sections 695(5) and 698(3) of ICTA. The corresponding rule for income tax is in section 678 of ITTOIA.
2428. Subsection (2) provides for a reduction to be made from the tax charged on the company following a claim for relief. The tax is to be reduced by an amount equal to the appropriate fraction of that tax. The fraction here (based on section 695(5) of ICTA) is slightly different from the fraction used for absolute interests (based on section 696(7) of ICTA). The labels in section 695(5)(a) and (b) of ICTA - the deemed income and the aggregate income respectively - were added as explanatory aids in the course of the 1988 consolidation. These labels are not retained.
2429. Section 695(6) of ICTA is not rewritten. The meaning of this provision, which was introduced when surtax was still charged, is now obscure and it is difficult to see how it could operate in the context of Self Assessment for companies. See Change 100 in Annex 1.
2430. This clause sets out the rules for determining from which part of the aggregate income of the estate a basic amount is treated as paid. It is based on sections 699A(2) and 701(3A) of ICTA. The corresponding rule for income tax is in section 679 of ITTOIA.
2431. Personal representatives may receive such income from a number of sources, and different rates of tax apply to different types of income. Some of the income is taxed in the hands of the personal representatives at the applicable rate (the basic rate or the dividend ordinary rate. See clause 963).
2432. The basic amounts of estate income do not always correlate precisely to the income received by the personal representatives. It is therefore necessary to attribute payments out of the residuary estate in the form of basic amounts to particular types of income received by the personal representatives.
2433. This clause deals with income which is treated as bearing income tax. It is based on section 699A of ICTA. The corresponding rule for income tax is in section 680 of ITTOIA.
2434. Where such income forms part of the aggregate income of the estate (as a result of clause 947(2)), this clause treats the income as having borne tax at either the dividend ordinary rate or the basic rate (as appropriate) for certain provisions within the Chapter.
2435. Section 699A(1)(b) of ICTA is not rewritten in this Bill. This provision provides that the sums to which section 699A(1)(a) of ICTA applies must be sums in respect of which the personal representatives are not directly assessable to United Kingdom income tax. Of the income referred to in section 699A(1)(a) of ICTA to which section 699A(1)(b) of ICTA applies, none appears to be directly assessable. So section 699A(1)(b) of ICTA serves no useful purpose.
2436. This clause is concerned with the appropriation of assets by personal representatives to themselves, any other transfer of assets and the set off or release of a debt. The clause is based on section 701(12) of ICTA. The corresponding rule for income tax is in section 681 of ITTOIA.
2437. This clause deals with adjustments after the end of the administration period. It is based on section 700(1) to (3) of ICTA. The corresponding rule for income tax is in section 682 of ITTOIA.
2438. This clause enables HMRC to obtain information for the purpose of this Chapter. It is based on section 700(4) of ICTA.
2439. This clause enables a company to request statements relating to a deceased persons estate. It is based on section 700(5) and (6) of ICTA.
2440. The last part of section 700(5) of ICTA that requires the statement to set out the matters in section 700(5)(a) to (b) separately for each part of estate income, in cases where different applicable rates apply, has not been rewritten. This requirement is considered unnecessary because the requirement to show amounts separately must occur in order for subsection 967(1)(b) of this clause to be satisfied.
2441. This clause provides the meaning of personal representatives. It is based on section 701(4) of ICTA.
2442. Section 9 of ICTA applies income tax law and practice to the charge and calculation of corporation tax and has been amended by ITEPA, ITTOIA and ITA in the course of the separation of corporation tax from income tax. (See the commentary on Chapter 1 of Part 2.)
2443. After this Bill is enacted the only context in which the principle underlying section 9 of ICTA will continue to be relevant is the charge to corporation tax on income from the holding of an office: this corporation tax charge still operates by reference to income tax.
2444. This clause applies the charge to corporation tax on income to income from an office. It is based on section 9 of ICTA. The charge on income is explained in clause 2.
2445. Section 9(3)(b) of ICTA was amended by ITEPA and refers to employment, pension and social security income. Previously section 9(3) referred to the like Schedules and Cases. As a company cannot be an employee and cannot receive pension and social security income, these aspects of section 9(3)(b) have not been rewritten. Employment income however includes income from holding an office. A company can hold an office - a common example is as a company secretary - so this clause rewrites that aspect of the source legislation.
2446. Under subsection (2) the amount of income from an office charged to tax is determined in accordance with income tax law and practice and under subsection (4) the provisions of ITEPA govern the calculation of the income from this source. The clause uses calculated for computed.
2447. Subsection (3) provides that subsection (2) is subject to provisions of the Corporation Tax Acts. The Corporation Tax Acts are defined in section 831(1)(a) of ICTA as enactments relating to the taxation of the income and chargeable gains of companies and of company distributions (including provisions relating also to income tax). In section 9(1) of ICTA the reference is to the Tax Acts. The reference has been narrowed since the qualifications to subsection (2) of this clause only occur in corporation tax enactments.
2448. Section 9(2A) of ICTA which provided that for corporation tax purposes no income shall be computed under ITTOIA will be spent when this Bill is enacted and is repealed.
2449. Section 9(4) of ICTA expands upon section 9(1). The part of this subsection that applies an exemption in an Income Tax Act (other than ITTOIA and ITA) has been rewritten in subsection (4)(b), since it is not absolutely certain that exemptions are covered by subsections (1) to (3) of this clause.
2450. The other part of section 9(4) that provides for any provision of the Income Tax Acts (again other than ITTOIA and ITA) which charges any amount to income tax to have like effect for corporation tax has not been rewritten since the determination of the charge is covered by subsections (1) to (2) of this clause (and in the context of employment income in ITEPA free standing charges are not believed to be an issue).
2451. Section 9(5) of ICTA applies where, by virtue of this section or otherwise any enactment applies both to corporation tax and income tax. This provision is amended by this Bill but is not repealed since it could have an application to an enactment that is not being rewritten.
2452. Section 9(6) of ICTA is repealed since it no longer serves a useful purpose.
2453. The interpretation of office in subsection (6) is based on section 5(3) of ITEPA. The ITEPA provision derives from the cases of Great Western Railway Company v Bater (1922), 8 TC 231 and Edwards v Clinch (1981), 56 TC 367. This accords with the application of income tax principles in subsection (2) based on section 9(1) of ICTA.
2454. This clause deals with bad debts arising from the holding of an office. It is based on section 88D of ICTA.
2455. The corresponding rule about trade debts is in clause 55.
2456. This clause is needed because section 88D(4) of ICTA imports the extended meaning of trade in section 6(4) of ICTA. So the ICTA rule applies to a vocation and also to an office or employment. In this Bill, for corporation tax purposes a company cannot carry on a vocation or be employed.
2457. Subsection (1) excludes from the rule any debts that are dealt with by the loan relationship rules in Parts 5 and 6 of the Bill. Section 88D(1) of ICTA also excludes debts that are dealt with by the rules for derivative contracts and intangible fixed assets. Those rules are not relevant to an office-holder and so are not mentioned in the clause.
2458. This Chapter applies the charge to corporation tax on income to payments to companies from unauthorised unit trusts. It is based on section 469 of ICTA. The corresponding income tax provisions are in Chapter 10 of Part 4 of ITTOIA.
2459. This clause sets out how relevant amounts are calculated and charged to corporation tax. It also points to particular provisions of ITA and of ICTA which deal with the position of a unit holder. It is new.
2460. This clause applies the charge to corporation tax on income to amounts shown in the unit trust schemes accounts as income available for payment to unit holders or for investment in the scheme. It is based on sections 9, 18 and 469 of ICTA. The corresponding charge for income tax is in section 547 of ITTOIA.
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