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Change 69: Miscellaneous income: beneficiaries’ income from estates in administration: set off of excess of allowable estate deductions in the final tax year of the administration period: absolute interests: clause 943

This change provides for any amounts that are allowable against the aggregate income of the estate in calculating the residuary income of the estate in the “final tax year” (the tax year in which the administration period ends), but cannot be so allowed because they exceed that income, to be set off against the amount in respect of which the beneficiary with an absolute interest is taxable or, if there is more than one such beneficiary, for a just and reasonable part to be set off.

It brings the income tax and corporation tax codes back into line.

Section 697(1A) of ICTA provides that where the deductions for any year exceed the aggregate income of the estate, the excess shall be carried forward and treated as an allowable deduction in the following year. Clearly, this is not possible in the tax year in which the administration period ends. In practice, however, excess deductions may be set off against any residuary income of the estate which has not been paid out. (This is often necessary since personal representatives may incur a high proportion of expense on the estate towards the end of the administration period, for example, because of the billing of legal or accountancy fees at the end.)

In rewriting section 697(1A) of ICTA, clause 943(3) reflects that practice by providing for a company’s basic amount of estate income for the final accounting period (that is, the company’s share of the residuary income of the estate that has not yet been paid out) to be reduced by the excess deductions. If there is more than one absolute interest in the residue of the estate at the end of the administration period a just and reasonable part of the excess is subtracted.

This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.

Change 70: Miscellaneous income: beneficiaries’ income from estates in administration: exclusion of income from specific dispositions and income from contingent interests from the aggregate income of the estate: clauses 947 and 949

This change excludes income from specific dispositions and income from contingent interests from the aggregate income of an estate (which is used to compute the residuary income of an estate and hence affects the amount of estate income that is chargeable to tax where a person has an absolute interest in the estate) and from the deductions made in determining the residuary income of the estate.

It brings the income tax and corporation tax codes back into line.

The aggregate income of the estate is defined in section 701(8) of ICTA as:

the aggregate income from all sources [for the tax year in question] of the personal representatives of the deceased as such, treated as consisting of -

    (a) any such income which is chargeable to United Kingdom income tax by deduction or otherwise, such income being computed at the amount on which tax falls to be borne for that year;

    (b) any such income which would have been so chargeable if it had arisen in the United Kingdom to a person resident and ordinarily resident there, such income being computed at the full amount thereof actually arising during that year, less such deductions as would have been allowable if it had been charged to United Kingdom income tax;

    (c) any amount of income treated as arising to the personal representatives under section 410(4) of ITTOIA 2005 (stock dividends) that would be charged to income tax under Chapter 5 of Part 4 of that Act if income arising to personal representatives were so charged (see section 413 of that Act);

    (d) in a case where section 419(2) of that Act applies (release of loans to participator in close company: debts due from personal representatives), 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 representatives as such under section 466 of that Act if the condition in section 466(2) had been met (gains from contracts for life insurance);

but excluding any income from property devolving on the personal representatives otherwise than as assets for payment of the debts of the deceased.

Property that is the subject of a specific disposition is available for the payment of the deceased’s debts and so is not excluded. However, under section 697(1)(b) of ICTA “the amount of any of the aggregate income of the estate for [a tax year] to which a person has on or after assent become entitled by virtue of a specific disposition either for a vested interest during the administration period or for a vested or contingent interest on the completion of the administration” is deductible from the aggregate income of the estate for that year in calculating the amount of the residuary income of an estate for that year. The Scottish version of this provision omits the words “on or after assent” and the words following “specific disposition”: see section 702(b) of ICTA. But the inclusion of the words “on or after assent” for the rest of the United Kingdom means that much of the income of the specific disposition will form part of the aggregate income. The result is that the measure of the income taken to be available to residuary beneficiaries is inflated.

In practice, HMRC allow all income from specific dispositions to be deducted from the aggregate income of the estate in calculating the residuary income of the estate for the year of assent and later years. But it is considered simpler for it merely to be excluded from what counts as the aggregate income and not to be deducted from it. Accordingly, the definition of “the aggregate income of the estate” in clause 947 of this Bill contains an exclusion for all income from specific dispositions to which a person is or may become entitled at subsection (5)(a). In consequence, the deduction for this income in section 697(1)(b) of ICTA and its adaptation for Scotland in section 702(b) of ICTA have not been rewritten.

Since income tax is treated as having been paid on this income, any reduction in the income taken to be available to beneficiaries as a result of this change will result in:

  • corporate beneficiaries who pay tax at the main corporation tax rate paying less tax; but

  • those not liable to corporation tax, or liable to tax at the small companies’ rate, not being able to reclaim so much tax.

This change is adverse to some taxpayers and is favourable to others in principle and in practice. But the numbers affected and the amounts involved are likely to be small.

Change 71: Miscellaneous income: beneficiaries’ income from estates in administration: removal of the requirement for interest to be annual and a charge on residue to be deductible in calculating the residuary income of the estate: clause 949

This change removes the requirements for interest to be annual and a charge on residue in order to be deductible from the aggregate income of the estate in calculating the residuary income of the estate.

It brings the income tax and corporation tax codes back into line.

The deductions that are allowable in ascertaining the amount of the residuary income of an estate for an income tax year are set out in section 697(1)(a) and (b) of ICTA. Section 697(1)(a) of ICTA refers to “the amount of any annual interest, annuity or other annual payment [for the year] which is a charge on residue ..”. There is a definition of “charges on residue” in section 701(6) of ICTA which is adapted for Scotland in section 702(d) of ICTA.

So far as the requirement for the interest to be annual is concerned, historically tax legislation has distinguished between short interest (which was not usually deductible) and annual or yearly interest (which was usually deductible). FA 1969 abolished the general relief for interest paid by taxpayers. However, specific provision was made for relief to continue to be allowed in respect of interest on borrowings for certain purposes. Annual or yearly interest continued to be significant as there was a requirement that tax was deducted from certain payments of yearly interest. But under current law interest, whether short or annual, may be deducted as an expense in computing the profit or loss of a trade for tax purposes if incurred wholly and exclusively for business purposes. (This is subject to certain restrictions on the deduction of annual interest paid to a person not resident in the United Kingdom and there is still a requirement to deduct tax in certain circumstances in relation to annual interest under section 874 of ITA, for example, where the payment is to a person whose usual place of abode is outside the United Kingdom.)

The other requirement in section 697(1)(a) of ICTA is that the payment of annual interest must be a charge on residue. “Charges on residue” are defined in section 701(6) of ICTA as certain specified liabilities properly payable out of the estate, as well as interest payable in respect of them. The definition is wide enough to include all interest ever likely to be paid by personal representatives, so the requirement that the payment is a charge on residue is otiose for interest.

Therefore, clause 949(2)(a) of this Bill, which rewrites section 697(1)(a) of ICTA, omits the requirements for interest to be annual and a charge on residue before it can be deducted from the aggregate income of the estate to calculate the residuary income of the estate. As a consequence, all interest paid by the personal representatives will be deductible, except for interest on unpaid inheritance tax which is expressly disallowed by section 233(3) of IHTA.

Since income tax is treated as having been paid on this income, any reduction in the income taken to be available to beneficiaries as a result of this change will result in:

  • corporate beneficiaries who pay tax at the main corporation tax rate paying less tax; but

  • those not liable to corporation tax, or liable to tax at the small companies’ rate, not being able to reclaim so much tax.

This change is adverse to some taxpayers and is favourable to others in principle and in practice. But the numbers affected and the amounts involved are likely to be small.

Change 72: Miscellaneous income: beneficiaries’ income from estates in administration: amounts grossed up using basic rate: reduction in share of residuary income of estate: clause 951

This change provides that the basic rate of income tax is used to gross up the sums paid before the completion of the administration of an estate (or sums payable on the completion of the administration of the estate) to a beneficiary with an absolute interest in the estate, for the purposes of determining whether the beneficiary has been charged to tax on more income than the beneficiary has enjoyed and adjusting the tax payable by it accordingly.

Section 697(2) of ICTA provides that where:

  • the total of a beneficiary’s shares of the residuary income of an estate for all years in which the beneficiary held an absolute interest exceeds,

  • the total sums paid or payable to that beneficiary during or at the end of the administration period (“benefits received”),

that excess is deducted from the beneficiary’s share of the residuary income of the estate in the year the administration is completed. Any excess which cannot be deducted in that year is deducted from the beneficiary’s share for the previous year and so on.

To determine the benefits received, section 697(3) of ICTA provides that the sums paid (or payable) are taken to be such amounts as would, after the deduction of income tax for the year of assessment in which they were paid, be equal to those sums. That is, they are grossed up.

When 697(3) of ICTA was rewritten for income tax purposes in section 668(5) of ITTOIA, as a result of section 4(1) of ICTA the amount of income tax was taken to have been deducted at the “basic rate”.

Section 4(1) of ICTA provided that any provision requiring, permitting or assuming the deduction of income tax from any amount, or treating income tax as having been deducted from or paid on any amount, should, subject to any provision to the contrary, be construed as referring to deduction or payment of income tax at the basic rate in force for the relevant year of assessment.

Section 4(1) of ICTA was repealed by ITA 2007 and was not rewritten as a general rule.

This change provides that the basic rate is to be used when amounts are grossed up for the purpose of this clause. It brings the income tax and corporation tax codes back into line, and restores the law to the position before section 4(1) of ICTA was repealed.

Current practice is that the benefits received are grossed up at the basic rate and therefore this change will make no difference in practice.

Whether this change is advantageous or not depends on how section 697(3) of ICTA would be interpreted in the absence of section 4(1) of ICTA. The change is advantageous if a grossing up rate of more than the basic rate would be applied, and disadvantageous if a lower rate would be applied or no grossing up could be done.

This change is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with generally accepted practice.

Change 73: Miscellaneous income: beneficiaries’ income from estates in administration: how reduction in share of residuary income of estate under section 697(2) and (3) of ICTA operates for successive absolute interests: clause 954

This change relates to the reduction in the share of the residuary income of the estate required where the amounts paid during or payable at the end of the administration period in respect of an absolute interest are less than the share of the residuary income for all tax years, and clarifies how the reduction is to be made in cases where the absolute interest has been held successively.

It brings the income tax and corporation tax codes back into line.

Under section 697(2) of ICTA on the completion of the administration of an estate in which a company has an absolute interest, a comparison is made between the aggregate benefits received in respect of that interest and the aggregate for all years of the residuary income of the company having that interest. If the aggregate of the benefits is less than the aggregate of the residuary income, the amount of the shortfall is to be applied in reducing the company’s residuary income for the tax year in which the administration is completed. If that does not exhaust the amount of the shortfall, the remainder is used to reduce the previous tax year’s residuary income, and so on for earlier tax years. (Section 697(2) of ICTA is rewritten in clause 951.)

Section 697(4) of ICTA provides that if a different person had an absolute interest in the residue at any time in the administration period “the aggregates mentioned in [section 697(2) of ICTA] shall be computed in relation to those interests taken together”. This is too vague to indicate how the reduction is to be made under section 697(2) of ICTA where there is more than one person with a share of the residuary income of the estate available to be reduced.

One possibility would be for the reduction to be apportioned in some way between the absolute interest holders. But it is not at all obvious how such an apportionment would work because section 697(2) of ICTA requires the excess for the final tax year of the administration period to be used to reduce the last absolute interest holder’s residuary income in the previous tax year. So it is not apparent whether that would have to be done before any other person’s reduction was made. The other holder or holders of the interest may have held it several tax years before the final year.

Clause 954(6) and (7) of this Bill provide for the reduction to be made in these circumstances. Clause 954(6) provides that the last absolute interest holder’s share of the residuary income should be reduced first. If there is still an excess of residuary income over the gross amount of all sums paid during or payable at the end of the administration period after going through all the years in which the final holder had the interest, the excess is then applied to the residuary income of the previous holder for the last tax year in which that person had the interest and then to earlier tax years (and earlier absolute interest holders as appropriate) working backwards.

This change is adverse to some taxpayers and favourable to others in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.

Change 74: Miscellaneous income: beneficiaries’ income from estates in administration: requirement for apportionments where the parts of the residuary estate in which successive interests subsist do not wholly correspond: clause 959

This change introduces a requirement for just and reasonable apportionments to be made in cases involving successive interests in the residuary estate where the part of the residuary estate in which a succeeding interest subsists does not wholly correspond with the part in which the preceding interest subsisted.

It brings the income tax and corporation tax codes back into line.

The taxation of successive interests in the residue of an estate is dealt with in section 698 of ICTA. Section 701(11) of ICTA provides that where different parts of the estate are the subject of different residuary dispositions, Part 16 of ICTA has effect in relation to each of those parts with the substitution for references to the estate of references to that part of the estate. (This is rewritten as a general rule for the interpretation of this Chapter in clause 934(3) of this Bill.) But there is no provision for situations where the residuary estate in which a later holder acquires an interest was not all subject to the interest held by a previous holder or is only a part of the residuary estate in which a previous holder held an interest.

Clause 959 of this Bill provides that in such cases such apportionments as are just and reasonable are to be made. As the apportionment depends on the facts of each case, this change could result in a favourable or adverse outcome for any particular taxpayer.

This change is adverse to some taxpayers and favourable to others in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.

Change 75: Investment income: foreign dividend coupons: charge on income treated as arising from foreign holdings: clause 974

This change clarifies two points in rewriting section 18(3B) of ICTA. First, that a “bank in the United Kingdom” means a bank’s office in the United Kingdom, whether the bank is resident in the United Kingdom or abroad. Second, that a “dealer in coupons in the United Kingdom” means a coupon dealer carrying on business in the United Kingdom, whether the dealer is resident in the United Kingdom or abroad.

This change reproduces Change 103 in ITTOIA and so brings income tax and corporation tax back into line.

Section 18(3B) of ICTA provides that a charge under Schedule D Case V arises on the sale or other realisation of coupons for foreign dividends by a “..bank in the United Kingdom..” which pays over the proceeds or carries them to an account. This is interpreted by HMRC to mean the office in the United Kingdom of a bank, whether that bank is incorporated in the United Kingdom or abroad. Similarly, a sale of such coupons to a “.. dealer in coupons in the United Kingdom ..” is taken to mean a coupon dealer carrying on business in the United Kingdom, whether resident in the United Kingdom or abroad.

Clause 974 is based principally on section 18(3) and (3B) of ICTA. It treats income as arising from foreign holdings where the proceeds of sale of a dividend coupon attached to the holding are (a) paid over or otherwise realised by a bank in the United Kingdom, or (b) arise from a sale to a coupon dealer in the United Kingdom by someone other than a bank or coupon dealer. So subsection (3) of the clause refers to “.. a bank’s office in the United Kingdom..” and subsection (4) refers to a person “.. dealing in coupons in the United Kingdom ..” in rewriting section 18(3B) of ICTA.

Where section 18(3B) of ICTA does not apply, then section 730 of ICTA may apply to charge the foreign dividends to corporation tax. An alternative interpretation to “in the United Kingdom” may, depending on circumstances, take a sale of coupons out of one of those ICTA provisions and into another. Whether or not more or less tax is paid as a result of being taxed under clause 974 of this Bill or section 730 of ICTA depends on the taxpayer’s own circumstances.

This change is adverse to some taxpayers and favourable to others in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.

Change 76: Relief for employee share acquisitions: recovery of relief given in respect of approved Share Incentive Plans (SIPs): clauses 986, 990, 992, 993 and 998

This change deals with the withdrawal of relief given in respect of an approved SIP.

Schedule 4AA to ICTA gives relief for the costs of setting up an approved SIP, contributions to a plan trust and the provision of shares awarded to employees under the SIP. It is rewritten in Chapter 1 of Part 11 of this Bill.

Paragraphs 10, 11 and 12 of Schedule 4AA to ICTA withdraw relief in certain circumstances.

If relief is withdrawn, Schedule 4AA to ICTA treats the company as receiving a trading receipt equal to the withdrawn relief. If the business is a property business the effect of section 21A of ICTA is to treat the company as receiving a receipt of the property business equal to the withdrawn relief (because section 85B of ICTA, which provides that Schedule 4AA shall have effect, is in Chapter 5 of Part 4 of ICTA and that Chapter is listed in section 21A(2) of ICTA). If relief is withdrawn under paragraph 11 of Schedule 4AA and the company is carrying on an investment or insurance business, paragraph 13 of Schedule 4AA provides for an amount to be taxed under Schedule D Case VI.

But paragraph 13 of Schedule 4AA to ICTA does not apply to the case where a deduction under paragraph 9 of Schedule 4AA is withdrawn under paragraph 10(1) or 10(8) or paragraph 12 of Schedule 4AA.

The purpose of this change is to clarify and make more consistent the way in which withdrawn relief is treated. This is done in clause 986 of this Bill, which deals with the treatment of amounts treated as received under Chapter 1 of Part 11 of this Bill when relief is withdrawn. The following clauses in this Bill also treat a company as receiving a an amount equal to the withdrawn relief: clauses 990(4) and (5), 992(4) and (6), 993(2) and (4) and 998(3) and (4). This amount is treated as received when the event withdrawing the relief occurs. In the source legislation it is treated as arising in the period of account in which the event occurs.

If the company is carrying on a trade or property business the amount is treated as a receipt of that trade or business, see clause 986(2) of this Bill.

If the company has ceased to carry on the trade or property business the amount is treated as a post-cessation receipt, see clause 986(3). This clarifies the existing law which does not expressly deal with the case of a trading receipt received after the trade has ceased.

If the company is not carrying on, or has not carried on, a trade or property business the amount is one to which the charge to corporation tax on income is applied, see clause 986(4). This includes not only the amount that is taxed under Schedule D Case VI by paragraph 13 of Schedule 4AA to ICTA but also an amount which paragraphs 10 and 12 of Schedule 4AA treat as a trading receipt even though the company is not carrying on a trade.

This change clarifies and standardises the law on the basis of generally accepted practice. To that extent this change removes in principle the right of a taxpayer to assert that the generally accepted practice is unlawful.

This change is adverse to some taxpayers in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.

Change 77: Additional relief for research and development: applies for corporation tax only: clauses 1044, 1045, 1063, 1068, 1074, 1087, 1092 and 1149

This change makes clear that the additional relief for expenditure on research and development (including vaccine research) and for expenditure on the remediation of contaminated land applies only for corporation tax.

Research and development

Schedule 20 to FA 2000 and Schedules 12 and 13 to FA 2002 apply only to companies. See the respective paragraphs 1(1) of each Schedule. The source legislation does not say that the relief given by those Schedules is restricted to a company liable to corporation tax. This leaves open the possibility that the reliefs are available to a company liable to income tax. Such a company would carry on a trade in the United Kingdom other than through a permanent establishment in the United Kingdom.

It is most unlikely that such a company would meet the qualifying conditions for relief but there are other more direct indicators that the reliefs are available only to companies liable to corporation tax.

First, the legislation is drafted in terms of “accounting periods” and that is a term that is defined only for corporation tax. See paragraph 1(1) of each Schedule and section 12 of ICTA.

Second, Parts 9A, 9BA and 9C of Schedule 18 to FA 1998 provide that claims to each relief must be made in the company tax return; that is, the company’s return of its corporation tax liability. There is no equivalent provision for income tax.

Third, paragraph 19 of Schedule 20 to FA 2000 and paragraph 19 of Schedule 13 to FA 2002 restrict the carrying forward of a loss that has been surrendered in return for the payment of a tax credit. There is no equivalent provision for income tax.

Schedule 20 to FA 2000 and Schedules 12 and 13 to FA 2002 are rewritten in Part 13 of this Bill (additional relief for expenditure on research and development) and repealed by Schedule 1. Clause 1044(1), and other clauses in Part 13, provide that the relief applies only for corporation tax.

 
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Prepared: 5 December 2008