Income Tax (Earnings and Pensions) Act 2003

397 Certain lump sums: calculation of amount taxed by virtue of section 394

(1) In a case where—

(a) section 394 applies to a lump sum, and

(b) any of the income or gains accruing to the scheme under which the lump sum is provided is not brought into charge to tax,

the amount which by virtue of that section counts as employment income, or is chargeable to tax under Case VI of Schedule D, is determined in accordance with this section.

(2) That amount is the amount of the lump sum reduced by the deduction applicable under subsection (3) or (4).

(3) Subject to subsection (4), the deduction applicable is the aggregate of—

(a) the sum or sums mentioned in section 395(3)(b) (if any), and

(b) the sum or sums mentioned in section 395(4)(b) (if any),

which in either case were paid by way of contribution to the provision of the lump sum.

(4) The deduction applicable is calculated in accordance with the formula in subsection (6) if—

(a) the lump sum is provided under the scheme on the disposal of a part of any asset or the surrender of any part of or share in any rights in any asset, and

(b) a person falling within subsection (5) has a right to receive, or any expectation of receiving, a further lump sum or further lump sums under the scheme on a further disposal of any part of the asset or a further surrender of any part of or share in any rights in the asset.

(5) The persons referred to in subsection (4)(b) are—

(a) the employee,

(b) a relative of that employee,

(c) the personal representatives of that employee, or

(d) any person connected with that employee.

(6) The formula referred to in subsection (4) is—

where—

• D is the deduction applicable;

• S is the aggregate amount of any sum or sums of a description mentioned in paragraphs (a) and (b) of subsection (3);

• LS is the amount of the lump sum received in relation to which the deduction applicable falls to be determined;

• MVA is the market value of the asset in relation to which the disposal or surrender occurred, on the assumption that the valuation is made immediately before the disposal or surrender.

(7) An individual may not claim that a deduction is applicable in relation to a lump sum more than once.

(8) For the purposes of this section it must be assumed that, unless the contrary is shown—

(a) the income and gains accruing to the scheme are not brought into charge to tax, and

(b) no deduction is applicable under subsection (3) or (4).

(9) For the purposes of this section income and gains accruing to the scheme are not to be regarded as brought into charge to tax merely because tax is charged in relation to the scheme in accordance with section 591C of ICTA.

(10) In this section “market value” is to be construed in accordance with sections 272 and 273 of TCGA 1992.