Part 14: Income tax liability: miscellaneous rules
Overview
2365.This Part contains four Chapters setting out various miscellaneous rules.
2366.Chapters 1 to 3 contain rules relating to:
limits on the liability to income tax of non‑UK residents,
residence for income tax purposes of individuals and personal representatives (together with signposts to the income tax residence rules for trustees and companies) and
liability to income tax in respect of income from property held in the joint names of spouses or civil partners.
2367.Chapter 4 contains a miscellany of other rules.
Chapter 1: Limits on liability to income tax of non‑UK residents
Overview
2368.This Chapter brings together the provisions of FA 2003 limiting the liability to income tax of non‑UK resident companies (liable otherwise than as trustees) and those of FA 1995 limiting such liability of all other non‑UK residents (including companies liable as trustees).
2369.This Chapter is based on:
section 128 of FA 1995 which limits the liability to income tax of non‑UK residents, except the liability of non‑UK resident companies liable otherwise than as trustees;
section 127 of FA 1995 so far as it supplements section 128 of that Act;
section 151 of FA 2003 which limits the liability to income tax of non‑UK resident companies liable otherwise than as trustees; and
Schedule 26 to FA 2003 so far as it supplements section 151(2)(c) of that Act.
2370.So far as they respectively supplement section 128 of FA 1995 and section 151(2)(c) of FA 2003, section 127 of FA 1995 and Schedule 26 to FA 2003 are in many respects substantially the same. Those provisions have, as far as possible, been combined in this Chapter.
2371.Section 127 of FA 1995 continues in force for the purpose of supplementing section 126 of that Act (UK representatives of non-residents) and Schedule 26 to FA 2003 continues in force for the purpose of supplementing section 148(3) of that Act (meaning of “permanent establishment”).
Section 810: Overview of Chapter
2372.This section identifies the categories of non‑UK residents to which this Chapter applies and provides signposts to the sections applicable to each category. It is new.
Section 811: Limit on liability to income tax of non‑UK residents
2373.This section relates to the liability to income tax for a tax year of non‑UK residents other than companies and of non‑UK resident companies liable as trustees. It is based on section 128(1), (2), (4) and (12) of FA 1995.
2374.This section does not create any liability to income tax but rather sets a limit on the amount of income tax to which the non‑UK resident would otherwise be liable.
2375.The combined effect of subsections (4) and (5) is that the non‑UK resident is not liable to income tax in respect of disregarded income (see section 813), except so far as income tax is deducted or treated as deducted from it or is paid in respect of it, or it carries a tax credit.
2376.Subsection (5)(a) is drafted in terms of the non‑UK resident’s disregarded income being left out of account, rather than in terms of its being deducted from total income as provided in section 128(1)(a)(i) of FA 1995.
2377.Subsection (5)(b) provides that personal reliefs are to be left out of account. A non‑UK resident may be entitled to such reliefs under section 278(2)(a) of ICTA, under section 56 or 460 of this Act or by virtue of a double taxation agreement. See the overview commentary on Part 3 for the interrelation of section 278(2)(a) of ICTA and sections 56 and 460 of this Act.
2378.All the reliefs to which section 278 of ICTA and sections 56 and 460 of this Act apply are listed in subsection (6).
Section 812: Case where limit not to apply
2379.This section provides that the liability of non‑UK resident trustees to income tax is not limited, if a beneficiary of the trust has a residence connection with the United Kingdom. It is based on section 128(5) and (6) of FA 1995.
Section 813: Meaning of “disregarded income”
2380.This section sets out the various descriptions of income which are defined as “disregarded income”. It is based on section 128(2) and (3) of FA 1995.
2381.Subsection (2) provides that income is not disregarded income if the non‑UK resident has a UK representative in relation to the income. This is the case if, for example, the non‑UK resident has income within the description of disregarded savings and investment income in section 825 which is brought into account in computing the profits of a manufacturing business carried on by the non‑UK resident through a branch in the United Kingdom.
2382.The definition of “disregarded pension income” in subsection (3) is based on section 128(3)(cc), (cca) and (cd) of FA 1995. Section 128(3)(cd) of FA 1995 relates to income which arises from a source in the United Kingdom and is chargeable to tax under Part 9 of ITEPA because section 609, 610 or 611 of that Act applies to it.
2383.Each of sections 609, 610 and 611 of ITEPA states that the section applies to an annuity which arises from a source outside the United Kingdom only if it is paid to a person resident in the United Kingdom. The definition of disregarded pension income omits the reference to the income arising from a source in the United Kingdom, on the basis that the wording of those sections of ITEPA makes it unnecessary.
Section 814: Meaning of “disregarded transaction income”
2384.This section defines “disregarded transaction income”. It is based on sections 127(1) and (15) and 128(3)(d) of FA 1995.
2385.Subsections (1) and (2) relate to income arising from a business carried on through a broker in the United Kingdom and introduce the conditions, referred to as “the independent broker conditions”, which must be met if the income is to be disregarded transaction income.
2386.Subsections (3) and (4) relate to income arising from a business carried on through an investment manager in the United Kingdom and introduce the conditions, referred to as “the independent investment manager conditions”, which must be met if the income is to be disregarded transaction income.
2387.The independent broker conditions in section 817 and the independent investment manager conditions in sections 818 to 824 replace for the purposes of subsections (2) and (4) the indirect references in section 128(3)(d) of FA 1995, through section 127(1)(b) and (c) of that Act, to section 127(2) and (3) of that Act.
2388.The words “without being chargeable as mentioned in paragraphs (a) to (ce) above” in section 128(3)(d) of FA 1995 have been omitted in subsections (2) and (4) on the basis that they are unnecessary.
2389.Subsection (5) defines the term “transaction income”. This definition includes the provisions of section 127(15)(b) of FA 1995 which explain what is meant by income arising from so much of a business as relates to transactions carried out through a branch or agency on behalf of a non‑UK resident.
Section 815: Limit on liability to income tax of non‑UK resident companies
2390.This section relates to the liability to income tax for a tax year of a non‑UK resident company which is liable otherwise than as a trustee. It is based on section 151(1), (3) and (4) of FA 2003.
2391.This section does not create any liability to income tax but rather sets a limit on the amount of income tax to which the non‑UK resident company would otherwise be liable.
2392.The combined effect of subsections (3) and (4) is that the non‑UK resident company is not liable to income tax in respect of disregarded company income except so far as income tax is deducted or treated as deducted from it or is paid in respect of it, or it carries a tax credit.
2393.Subsection (4) is drafted in terms of the non‑UK resident company’s disregarded company income being left out of account, rather than in terms of its being deducted from total income as provided in section 151(1)(a)(i) of FA 2003.
2394.Section 151(1)(a)(ii) of FA 2003, which disregards reliefs to which a company is entitled under section 788 of ICTA, has been omitted. It is not appropriate to companies. See Change 120 in Annex 1.
Section 816: Meaning of “disregarded company income”
2395.This section sets out the various descriptions of income which are defined as “disregarded company income”. It is based on section 151(2) of FA 2003 and paragraphs 1(1) and (2), 2(1) and 3(1) of Schedule 26 to that Act.
2396.The term “disregarded company income” mirrors the term “disregarded income” defined in section 813 for the purposes of section 811. Section 151(2) of FA 2003 sets out the “income to which this section applies”, but does not make use of a defined term.
2397.Subsection (1)(c) relates to income arising from transactions carried out through a broker in the United Kingdom and introduces the conditions, referred to as “the independent broker conditions”, which must be met if the income is to be disregarded company income.
2398.Subsection (1)(d) relates to income arising from investment transactions carried out through an investment manager in the United Kingdom and introduces the conditions, referred to as “the independent investment manager conditions”, which must be met if the income is to be disregarded company income.
2399.Subsection (1)(c) and (d) are based on section 151(2)(c) of FA 2003, which refers to a transaction carried out through a broker or investment manager in the United Kingdom “acting as an agent of independent status in the ordinary course of his business”. Schedule 26 to that Act then sets out the conditions which must be met if the broker or investment manager is to be treated as so acting.
2400.This structure has been simplified so that subsection (1)(c) and (d) refer directly to the independent broker conditions in section 817 and the independent investment manager conditions in sections 818 to 824.
2401.The effect of the words “in the course of that company’s trade” in paragraph 1(1) of Schedule 26 to FA 2003 has been preserved by including the equivalent words in subsection (1)(c) and (d).
Section 817: The independent broker conditions
2402.This section sets out the independent broker conditions to be met in relation to a transaction carried out on behalf of a non-UK resident by a broker in the United Kingdom for the purposes of sections 813 and 816. It is based on the provisions of sections 127(1) and (2) and 128(3) of FA 1995 and section 151(2) of and paragraph 2(1) and (2) of Schedule 26 to FA 2003.
2403.Three of the conditions, in section 127(2)(a) to (c) of FA 1995 and paragraph 2(2)(a) to (c) of Schedule 26 to FA 2003, are substantively the same. Accordingly, there is a set of common conditions, A to C, in subsections (2) to (4), which apply to all non‑UK residents, including non‑UK resident companies.
2404.The final condition in section 127(2)(d) of FA 1995 is not substantively the same as the final condition in paragraph 2(2)(d) of Schedule 26 to FA 2003. These conditions are, therefore, set out separately.
2405.Condition D in subsection (5), based on the condition in section 127(2)(d) of FA 1995, applies for the purposes of section 813.
2406.Condition E in subsection (6), based on the condition in paragraph 2(2)(d) of Schedule 26 to FA 2003, applies for the purposes of section 816.
2407.In subsection (5), the words “amounts which are chargeable to capital gains tax” reflect the words “other amounts” in section 127(2)(d) of FA 1995. Those other amounts are the “amounts which, by reference to that branch or agency, are chargeable to capital gains tax under section 10 of the Taxation of Chargeable Gains Act 1992 (non‑residents)” mentioned in section 126(2)(c) of FA 1995.
2408.In subsection (5), a reference to “transaction income” has been substituted for the reference in section 127(2)(d) of FA 1995 to “taxable sums”. The latter expression includes not only income but also chargeable gains arising from transactions in respect of which the independent broker conditions are met. It is not necessary to include specific reference here to such chargeable gains, as, by virtue of the reference to taxable sums in section 127(2)(d) of FA 1995, the non‑UK resident will not, under section 126(2) of that Act, have the broker as the non‑UK resident’s UK representative in relation to such chargeable gains.
2409.In subsection (6), it has been made clear that the other transaction carried out in the same accounting period may be of any kind and is not limited to broking transactions.
Section 818: The independent investment manager conditions
2410.This section sets out the independent investment manager conditions to be met in relation to a transaction carried out on behalf of a non-UK resident by an investment manager in the United Kingdom for the purposes of sections 813 and 816. It is based on the provisions of sections 127(1) and (3) and 128(3) of FA 1995 and section 151(2) of and paragraphs 3(1) and (2) and 7(2) of Schedule 26 to FA 2003.
2411.Five of the conditions, in section 127(3)(a) to (e) of FA 1995 and paragraph 3(2)(a) to (e) of Schedule 26 to FA 2003, are substantively the same. Accordingly, there is a set of common conditions, A to E, in subsections (2) to (6), which apply to all non‑UK residents, including non‑UK resident companies.
2412.The final condition in section 127(3)(f) of FA 1995 is not substantively the same as the final condition in paragraph 3(2)(f) of Schedule 26 to FA 2003. These conditions are, therefore, set out separately.
2413.Condition F in subsection (7), based on the condition in section 127(3)(f) of FA 1995, applies for the purposes of section 813.
2414.Condition G in subsection (8), based on the condition in paragraph 3(2)(f) of Schedule 26 to FA 2003, applies for the purposes of section 816.
2415.In subsection (7), the words “amounts which are chargeable to capital gains tax” reflect the words “other amounts” in section 127(3)(f) of FA 1995. Those other amounts are the “amounts which, by reference to that branch or agency, are chargeable to capital gains tax under section 10 of the Taxation of Chargeable Gains Act 1992 (non‑residents)” mentioned in section 126(2)(c) of FA 1995.
2416.In subsection (7), a reference to “transaction income” has been substituted for the reference in section 127(3)(f) of FA 1995 to “taxable sums”. The latter expression includes not only income but also chargeable gains arising from transactions in respect of which the independent investment manager conditions are met. It is not necessary to include specific reference here to such chargeable gains, as, by virtue of the reference to taxable sums in section 127(3)(f) in FA 1995, the non‑UK resident will not under section 126(2) of that Act have the investment manager as the non‑UK resident’s UK representative in relation to such chargeable gains.
2417.In subsection (8), it has been made clear that the other transaction carried out in the same accounting period may be of any kind and is not limited to investment transactions.
Section 819: Investment managers: the 20% rule
2418.This section sets out the “20% rule” for investment managers. It is based on section 127(4) of FA 1995 and paragraph 4(1) of Schedule 26 to FA 2003 which are substantively the same.
2419.The 20% rule has two requirements. The first requirement is that the investment manager and connected persons must intend that any interest that they may have in the non‑UK resident’s “relevant disregarded income” will not exceed 20% of that income. The second requirement applies if that intention is not fulfilled. The 20% rule will continue to be met if the only reason why it is not fulfilled is because of matters outside the control of the investment manager or connected persons despite their having taken reasonable steps to mitigate the effect of those matters.
Section 820: Meaning of “qualifying period”
2420.This section defines the term “qualifying period”. It is based on section 127(7) of FA 1995 and paragraph 4(2) of Schedule 26 to FA 2003.
2421.Subsection (2), based on section 127(7) of FA 1995, makes use of the term “transaction income”, defined in section 814(5), in substitution for the term “taxable sums” in the source legislation. “Taxable sums” includes not only income but also chargeable gains, but in this context a reference to chargeable gains is otiose and has been omitted.
2422.Subsection (3), based on paragraph 4(2) of Schedule 26 to FA 2003, makes explicit that the accounting period referred to is that of the non‑UK resident company.
2423.The separate definitions in subsections (2) and (3) preserve the difference between their respective source provisions and ensure that those subsections remain in line with those provisions as they continue to apply for the purposes of section 126 of FA 1995 and section 148 of FA 2003 respectively.
Section 821: Meaning of “relevant disregarded income”
2424.This section defines the term “relevant disregarded income”. It is based on section 127(5) of FA 1995 and paragraph 4(3) of Schedule 26 to FA 2003.
2425.In subsection (2), a reference to “the total of the non‑UK resident’s income” has been substituted for the reference in section 127(5) of FA 1995 to “the aggregate of such of the profits and gains of the non‑resident”. As section 127(5)(b) of FA 1995 requires that this aggregate falls to be treated (apart from the 20% rule) as excluded income, the reference to “such of the profits and gains” is limited by the source legislation to so much of the profits and gains as is income. The substitution makes this clear.
2426.In subsection (3), a reference to “the total of the non‑UK resident company’s income” has been substituted for the reference in paragraph 4(3) of Schedule 26 to FA 2003 to “the aggregate of such of the chargeable profits of the company”. See Change 121 in Annex 1.
2427.The separate definitions in subsections (2) and (3) preserve the difference between the respective source provisions and ensure that those subsections remain in line with those provisions as they continue to apply for the purposes of section 126 of FA 1995 and section 148 of FA 2003 respectively.
2428.In subsection (4) it is made clear that the transactions referred to are investment transactions. That only investment transactions are referred to in section 127(5) of FA 1995 is clear as the profits or gains there mentioned must be excluded income. But paragraph 4(3) of Schedule 26 to FA 2003 refers only to transactions. That paragraph does not, however, cover any wider class of transactions than section 127(5) of FA 1995.
2429.In subsection (4)(b), the words:
“in relation to which the independent investment manager conditions are met, ignoring the requirements of the 20% rule”
are substituted both for the words in section 127(5)(b) of FA 1995:
“for the purposes of section 128 below would fall (apart from the requirements of subsection (4) above) to be treated as excluded income for any of those chargeable periods”
and for the words in paragraph 4(3) of Schedule 26 to FA 2003:
“in relation to which the manager does not (apart from the requirements of the 20% rule) fall to be treated as a permanent establishment of the company.”
2430.The substituted words do not change the law relating to the limit on the liability of a non-UK resident other than a company in section 811. Only income deriving from investment transactions is measured for the purposes of the 20% rule in section 127(4) of FA 1995. Income arising from any other type of transaction is irrelevant.
2431.Income is only “relevant excluded income” under section 127(5) of FA 1995 if it derives from investment transactions carried out by the manager while acting on the non-resident’s behalf (see section 127(5)(a) where the word “transactions” refers back to “investment transactions” in section 127(1)(c)). Under section 127(5)(b) of FA 1995, it also has to be treated as “excluded income” under section 128(3) of that Act. The only way that income arising from so much of a business as relates to investment transactions can be “excluded income” is if the conditions in section 127(3) of FA 1995 (the investment manager conditions) are met.
2432.In relation to the limit on the liability of a non-UK resident company in section 815, this substitution avoids the need for the reader to refer to section 148 of and Schedule 26 to FA 2003 in order to determine whether the investment manager is a permanent establishment. The substituted words do not change the law. If the independent investment manager conditions are met, or would be if the 20% rule were met, the investment manager cannot be a permanent establishment of the company in relation to the transaction.
Section 822: Meaning of “beneficial entitlement”
2433.This section defines the term “beneficial entitlement”. It is based on section 127(6) of FA 1995 and paragraph 4(4) of Schedule 26 to FA 2003, which are substantively the same.
Section 823: Treatment of transactions where requirements of 20% rule not met
2434.This section provides that, if the 20% rule is not met but all the other independent investment manager conditions are met, only the income in relation to which the 20% rule is not met is not relevant disregarded income. It is based on section 127(8) of FA 1995 and paragraph 4(5) of Schedule 26 to FA 2003.
2435.So far as that section and that paragraph differ in approach, the difference is preserved by subsection (2) so that those provisions remain in line with their source provisions as they continue to apply for the purposes of section 126 of FA 1995 and section 148 of FA 2003 respectively.
2436.A reference to “transaction income”, which is defined in section 814(5), has been substituted in subsection (2)(a) for the reference to “taxable sums” in section 127(8) of FA 1995. The term “taxable sums”, as defined in section 127(3) of that Act read with sections 127(1) and 126(2)(c) of that Act, includes amounts chargeable to capital gains tax under section 10 of TCGA. But, in relation to section 127(8) of FA 1995 as it has effect for the purposes of determining whether income is excluded income within section 128(3)(d) of that Act, reference to chargeable gains is unnecessary.
2437.In subsection (2)(b), a reference to “the income of the non‑UK resident company” has been substituted for the reference in paragraph 4(5) of Schedule 26 to FA 2003 to “the chargeable profits of the non‑resident company”. See Change 121 in Annex 1.
Section 824: Application of 20% rule to collective investment schemes
2438.This section modifies the 20% rule where the non‑UK resident is a participant in a collective investment scheme. It is based on section 127(9), (10) and (11) of FA 1995 and paragraph 5 of Schedule 26 to FA 2003, which are substantively the same.
2439.This section applies at the level of the scheme itself, treating it as if it were a non‑UK resident company, see subsection (3).
2440.Subsection (4) applies to a scheme which, if it was assumed to be a non‑UK resident company, would not be regarded as carrying on a trade in the United Kingdom. The 20% rule is treated as satisfied in relation to such a scheme.
2441.Subsection (5) applies to a scheme which, if it was assumed to be a non‑UK resident company, would be regarded as carrying on a trade in the United Kingdom. The 20% rule applies to such a scheme with the modifications in subsection (6).
2442.The definition of “the appropriate relevant period” in subsection (7) links into the meaning of “qualifying period” given by section 820. The reference to the term “transaction income” in paragraph (a) of that definition follows from the reference to that term in section 820(2)(a). See the commentary on section 820(2).
Section 825: Meaning of “disregarded savings and investment income”
2443.This section defines the term “disregarded savings and investment income” which is principally used in sections 813 and 816. It is based on the corresponding parts of paragraph (a) of section 128(3) of FA 1995 and of paragraph (a) of section 151(2) of FA 2003 and on paragraph (aa) of each of those subsections, all of which are substantively the same.
2444.Income chargeable under Chapter 5 of Part 4 of ITTOIA (stock dividends from UK resident companies) has been included in subsection (1)(a) as an additional description of disregarded income. See Change 122 in Annex 1.
Section 826: Meaning of “disregarded annual payments”
2445.This section defines the term “disregarded annual payments” which is principally used in sections 813 and 816. It is based on the corresponding parts of section 128(3)(a) of FA 1995 and section 151(2)(a) of FA 2003 other than those on which section 825 is based.
Section 827: Meaning of “investment manager” and “investment transaction”
2446.This section defines the terms “investment manager” and “investment transactions” which underlie the independent investment manager conditions. It is based on section 127(12) and (13) of FA 1995 and paragraph 3(1), (3) and (4) of Schedule 26 to FA 2003.
2447.Subsection (1) is based on the definition of an “investment manager” in paragraph 3(1) of Schedule 26 to FA 2003 rather than the slightly different, but substantively the same, definition of “the manager” in section 127(3)(a) of FA 1995.
2448.The definition of “transaction” in subsections (2) and (3) is based on section 127(12) and (13) of FA 1995 and paragraph 3(3) and (4) of Schedule 26 to FA 2003, which are identical.
2449.Section 1014 containing general provision for the making of regulations applies for the purposes of subsection (2)(c).
2450.Regulations (SI 2003/2172 and SI 2003/2173) have been made in identical terms under the source legislation, section 127(12)(c) of FA 1995 and paragraph 3(3)(c) of Schedule 26 to FA 2003, designating as investment transactions swap contracts settled in cash or foreign currency (other than contracts relating to land, insurance or capital redemption business).
Section 828: Transactions through brokers and investment managers
2451.This section explains when a person is to be regarded as carrying out a transaction on behalf of another and makes provision for a person part only of whose business is as a broker or investment manager. It is based on section 127(14) and (15) of FA 1995 and paragraph 7(1) and (4) of Schedule 26 to FA 2003.
2452.There is a slight difference between the wording of section 127(14) of FA 1995 which refers to:
“a person who…provides investment management services”
and that of paragraph 7(4) of Schedule 26 to FA 2003 which refers to:
“a person who…provides investment services.”
2453.The words in paragraph 7(4) of Schedule 26 to FA 2003 are not capable, in practice, of having any different meaning from those in section 127(14) of FA 1995 and subsection (2) accordingly applies for all purposes of this Chapter.
Chapter 2: Residence
Overview
2454.This Chapter contains provisions relating to the determination of residence for the purposes of liability to income tax.
2455.The question whether or not a person is UK resident is primarily to be determined in accordance with case law. A limited number of statutory rules either supplement or disapply the case law rules in specific circumstances.
2456.Sections 829 to 833 contain provisions relating to the residence of individuals, section 834 contains provisions relating to the residence of personal representatives and section 835 provides signposts to provisions relating to the residence of trustees and companies.
Section 829: Residence of individuals temporarily abroad
2457.This section provides that an individual who is ordinarily UK resident is not treated as becoming non-UK resident for income tax purposes if the individual has left the United Kingdom for the purpose only of occasional residence abroad. It is based on section 334 of ICTA.
2458.Section 334 of ICTA applies only to a person who is a Commonwealth citizen or a citizen of the Republic of Ireland. This section is not limited in this way. In addition, it is made explicit that the rule in this section applies only if the individual is UK resident, as well as ordinarily UK resident, at the time the individual leaves the United Kingdom. See Change 123 in Annex 1.
2459.The provisions in section 334 of ICTA can be traced back to the Napoleonic period and have been in continuous existence since the reintroduction of income tax by the Income Tax Act 1842, where the provisions were to be found in section 39. A lengthy discussion of the history of the provisions (then to be found in section 49 of ICTA 1970) can be found in the judgment of Nicholls J in Reed (HM Inspector of Taxes) v Clark (1985), 58 TC 528 Ch D(11).
2460.This section moves away from the historic language which has caused the effect of section 334 of ICTA and its predecessors to be somewhat obscured. During the course of his judgment in Reed v Clark, Nicholls J stated (at page 552E-G) that:
“Section 49 is a puzzling section, in that precisely what was its intended purpose is not at all easy to perceive. This makes interpretation of its terms the more difficult. …
Despite this I am in no doubt that section 49 is a substantive charging provision.”
2461.Subsection (1) makes clear that this section applies only to determine the residence status of individuals and the term “individual” is, accordingly, used throughout this section in place of “person” in section 334 of ICTA.
2462.The term “occasional residence abroad” has been retained, as it has been the subject of judicial interpretation in the decided cases on section 334 of ICTA and its predecessors.
2463.Subsection (2) replaces the words in section 334 of ICTA providing that the individual to whom the section applies shall:
“(a)…be assessed and charged to income tax notwithstanding that at the time the assessment or charge is made he may have left the United Kingdom…
(b)…be charged as a person actually residing in the United Kingdom upon the whole amount of his profits or gains, whether they arise from property in the United Kingdom or elsewhere, or from any allowance, annuity or stipend, or from any trade, profession, employment or vocation in the United Kingdom or elsewhere.”
2464.Unlike the provisions of section 334 of ICTA as interpreted in Reed v Clark, subsection (2) does not impose a separate charge to income tax but treats the individual as UK resident for the purpose of determining the individual’s liability to income tax for a tax year, leaving the charging provisions of the Income Tax Acts to determine whether and to what extent the individual is so liable in respect of any particular source of income. The effect on the liability of the individual is the same.
2465.Subsection (2) also clarifies that the provision continues to apply for any tax year in which the individual remains outside the United Kingdom for the purpose only of occasional residence abroad. See the judgment of the Lord President in Lloyd v Sulley (1884), 2 TC 37 (Court of Exchequer (Scotland) - First Division) at page 42, referring to section 39 of the Income Tax Act 1842:
“Now that is a very important provision as extending the meaning of the words in the taxing clause, ‘residing in the United Kingdom’. It extends it to a person who is not for a time actually residing in the United Kingdom, but who has constructively his residence there because his ordinary place of abode and his home is there, although he is absent for a time from it, however long continued that absence may be.”
2466.Subsection (2) does not itself determine whether or not the individual’s residence abroad is occasional. That is to be determined in accordance with the principles set out in the cases in which section 334 of ICTA and its predecessors have been considered.
2467.Like section 334 of ICTA, this section does not include anything concerning the ordinary residence of the individual after the individual has left the United Kingdom. The question whether the individual continues to be ordinarily UK resident falls to be determined in accordance with case law.
Section 830: Residence of individuals working abroad
2468.This section provides that, in the cases to which it applies, the fact that living accommodation in the United Kingdom is available for the individual’s use is to be ignored in determining whether or not the individual is UK resident. It is based on section 335 of ICTA.
2469.Subsection (1) makes clear that this section relates only to the residence status of individuals and the term “individual” is, accordingly, used throughout this section in place of “person” in section 335 of ICTA.
2470.In subsection (2) the phrase “any living accommodation available in the United Kingdom for the individual’s use” has been substituted for the phrase “any place of abode maintained in the United Kingdom for his use” in section 335(1) of ICTA. The reference to the availability of living accommodation brings the wording into line with the wording in HMRC booklet IR20 (Residents and non‑residents: Liability to tax in the UK) and with the phrase “living accommodation available in the United Kingdom for his use” in section 336(3) of ICTA, on which sections 831(1) and 832(1) are based.
2471.This does not amount to a change in the law. To the extent that there is any difference between “living accommodation” and “place of abode maintained”, “living accommodation” is the broader concept. In any event, available living accommodation which does not amount to a place of abode maintained for the use of an individual to whom section 335 of ICTA applies does not fall to be taken into account for the purposes of determining the individual’s residence status.
Section 831: Foreign income of individuals in the United Kingdom for temporary purpose
2472.This section provides that an individual who is in the United Kingdom for a temporary purpose and stays there for only a limited period is not to be treated as UK resident for the purposes of certain charges to income tax on income from a source outside the United Kingdom. It is based on section 336(1), (1A) and (3) of ICTA.
2473.The provisions of section 336(2) of ICTA which deals with employment income of individuals in the United Kingdom for a temporary purpose are contained in section 832.
2474.The language of section 336(1) of ICTA dates back to Napoleonic times, while that of section 336(2) dates back only just over 50 years. These differences in language have been preserved where necessary.
2475.Subsection (1), which describes to whom this section applies, makes clear that this section relates only to the residence status of individuals and the term “individual” is used throughout this section in place of “person” in section 336 of ICTA.
2476.Subsection (1)(a) retains the distinction between section 336(1)(a) of ICTA which refers to the person not being in the United Kingdom (emphasis added):
“with any view or intent of establishing his residence there”
and section 336(2) of that Act which refers to the person not being in the United Kingdom (emphasis added):
“with the intention of establishing his residence there.”
2477.Subsection (1)(a) refers only to “view” and omits reference to “intent” on the basis that “view” is wider than “intent” or “intention”.
2478.Section 336(1)(b) of ICTA refers to the person having:
“not actually resided in the United Kingdom at one time or several times for a period equal in the whole to six months in any year of assessment”
“while section 336(2) of that Act refers to the person having:”
not in the aggregate spent at least six months in the United Kingdom in the year of assessment.
2479.Subsection (1)(b) retains the expression “actually resided” rather than adopting the expression “spent”, as “actually resided” may not in every circumstance be synonymous with “spent”. But the language of section 336(1)(b) of ICTA relating to the determination of the period has been modernised, including by substituting reference to 183 days for the reference to six months in section 336(1)(b) of ICTA. See Change 124 in Annex 1.
2480.Subsection (2) restates the provisions listed in section 336(1A) of ICTA. Rule 1 is based on section 336(1A)(b) and (c) and Rule 2 on section 336(1A)(a) of that Act.
2481.The reference in each Rule to treating the individual as non‑UK resident follows the approach of section 336(2) of ICTA and replaces the reference in section 336(1) of that Act to the person not being charged “as a person residing in the United Kingdom”.
2482.The words “income arising from a source outside the United Kingdom” in both Rules give effect to the words “profits or gains received in respect of possessions or securities out of the United Kingdom” in section 336(1) of ICTA.
2483.Subsection (3)supplements paragraph (e) of Rule 1 with a reminder that a claim has to have been made under section 647 of ITEPA and to have been accepted by the Commissioners for Her Majesty’s Revenue and Customs for the individual to have the benefit of the exemption in section 651 of that Act.
2484.Subsections (4) and (5) are based on the final words of section 336(1)(b) of ICTA:
“but if any such person resides in the United Kingdom for such a period he shall be so chargeable for that year.”
Section 832: Employment income of individuals in the United Kingdom for temporary purpose
2485.This section provides that an individual who is in the United Kingdom for a temporary purpose and stays there for only a limited period is not to be treated as UK resident for the purposes of the rules in Chapters 4 and 5 of Part 2 of ITEPA which determine taxable earnings from employment. It is based on section 336(2) and (3) of ICTA.
2486.Subsection (1), which describes to whom this section applies, makes clear that this section relates only to the residence status of individuals and the term “individual” is used throughout this section in place of “person” in section 336 of ICTA.
2487.In subsection (1)(b), reference to 183 days has been substituted for the reference to six months in section 336(2) of ICTA. See Change 124 in Annex 1 and the commentary on section 831.
2488.Subsections (3) and (4) are based on the final words of section 336(2) of ICTA:
“but shall be treated as resident there if he has.”
Section 833: Visiting forces and staff of designated allied headquarters
2489.This section provides that the presence in the United Kingdom of certain individuals who are in the United Kingdom for specific purposes only does not cause the individual to be treated, for income tax purposes, as being UK resident or as changing the individual’s residence or domicile (see subsection (4)). It is based on section 323 of ICTA.
2490.This section applies to an individual who is in the United Kingdom by reason only of being a member of a visiting force of a designated country or of a civilian component of such a force (see subsection (1)) or by reason of falling into one of the categories of individuals mentioned insubsections (2) and (3). But it does not apply to British and certain other citizens (see subsection (1)(c)).
2491.As it is clear that this section can only relate to individuals, the term “individual” is used throughout this section in place of “person” in section 323 of ICTA.
2492.Subsection (1) sets out in full the description of a member of a visiting force to whom this section applies. This avoids the cross-reference to section 303(1) of ITEPA in section 323(2) of ICTA.
2493.The definitions of “member” (in relation to a visiting force), “visiting force” and “member of a civilian component of a visiting force” are contained in Part 1 of the Visiting Forces Act 1952 (the 1952 Act). Those definitions have not been set out in full in this section - partly for reasons of length and partly to retain the explicit link between this section and the 1952 Act. Subsection (6) incorporates them by reference.
2494.This section corrects a minor drafting error in section 323(4) of ICTA. Section 323(4) of ICTA provides that references to a visiting force in section 323(2) apply also to a civilian component of such a force and that “that subsection shall be construed as one with Part 1 of the Visiting Forces Act 1952”. As there is no reference to “civilian component” in section 323(2) of ICTA, construing that subsection as one with Part 1 of the 1952 Act does not have the effect of applying the definition of “member of a civilian component of a visiting force” in section 10 of that Act for the purposes of section 323(4) or (5) of ICTA. There is no doubt that the definition is intended to apply.
2495.This section makes the correction by:
incorporating in subsection (1) the provisions of section 323(4) of ICTA applying section 323(2) of that Act to a member of a civilian component of a visiting force; and
providing in subsection (6) not only for subsection (1) to be interpreted as if in Part 1 of the 1952 Act, but also for subsection (2), which is based on section 323(5) of ICTA, to be so interpreted.
2496.Section 303 of ITEPA, which is based on part of section 323 of ICTA and applies to the individuals to whom this section applies, provides that earnings paid to such individuals by the government of a designated country or by a designated allied headquarters are exempt from income tax.
2497.The effect of section 833 of this Act is that an individual to whom it applies is not liable to United Kingdom income tax on income arising from a source outside the United Kingdom.
2498.Subsection (5) ensures that an individual to whom this section applies has the benefit of the personal reliefs to which the individual would be entitled if resident in the United Kingdom. Such reliefs will, accordingly, be available in calculating the individual’s liability to United Kingdom income tax on such income as, for example, United Kingdom bank interest, dividends from UK resident companies and UK-based earnings which are not exempt under section 303 of ITEPA.
Section 834: Residence of personal representatives
2499.This section sets out rules for determining the residence status of personal representatives, in their capacity as such, where one or more (but not all) of them are UK resident in their own capacity. It is based on section 111(1) and (2) of FA 1989.
2500.Section 111 of FA 1989 was enacted, together with section 110 of that Act (residence of trustees), following the decision in Dawson v CIR (1989), 62 TC 301 HL(12). Section 110 of FA 1989 was repealed by FA 2006 and replaced by similar but extended provisions in section 685E(2) to (7) of ICTA (see the commentary on sections 475 and 476).
2501.In Dawson it was held that under the law then in force trust income from a foreign source could not be assessed on a UK resident trustee whose fellow trustees were non‑UK resident. In his speech, with which the other members of the Judicial Committee concurred, Lord Keith of Kinkel stated (at page 329):
“The argument for the Revenue accepts that the income of the settlements arose or accrued to the three trustees jointly, and not jointly and severally, so that none of them was entitled in law separately to any particular share or fraction of the income. It is contended, however, that the whole income from the foreign investments did, on a proper construction of para 1(a)(i) of s 108 [of ICTA 1970], arise or accrue to the Respondent as a person residing in the United Kingdom, and that the circumstance that it did so to him jointly with two co-trustees resident abroad is irrelevant. However, the word “person” in that sub-sub-paragraph must include the plural “persons” by virtue of s 6(c) of the Interpretation Act 1978. If all three trustees had been resident in the United Kingdom application of the enactment would have been such the income would have been treated as arising or accruing to all three, and all three would have been jointly assessable to tax. In the situation which prevails here, namely that one of the trustees is resident in the United Kingdom but the other two are resident abroad, the income likewise arises or accrues to all three, but all three cannot be jointly assessed to tax. There can be no justification for assessing to tax the Respondent alone, on the ground that he is resident in the United Kingdom, because the income does not arise or accrue to him personally. He has no right of control over the income. His only interest in it is a right and duty to secure, in conjunction with his co-trustees, that it is applied in accordance with the directions of the trust deeds. Similarly, when one turns to s 114(1) of the Act of 1970 it is found that the persons receiving or entitled to the income are the three trustees jointly. Should the plural “persons” be turned into the singular “person” it is found that the Respondent as an individual cannot properly be described as the person receiving or entitled to the income.”
2502.The effect of section 111 of FA 1989 is to determine, in a case where some of the persons who are the personal representatives are in their own capacity UK resident and some are not, that the personal representatives, in their capacity as such, are either all UK resident or all non‑UK resident.
2503.If all the personal representatives are UK resident, then, as the persons jointly receiving or entitled to the income, the personal representatives are chargeable in that capacity to income tax in respect of all the income so arising, whether from a United Kingdom or a foreign source. If none of them is UK resident, they are only chargeable in that capacity to income tax in respect of any of that income from a United Kingdom source.
2504.This section determines the residence status of all of the personal representatives in that capacity by reference to the residence or domicile of the deceased at the time of death.
2505.If the deceased was UK resident, ordinarily UK resident or domiciled in the United Kingdom at the time of death, any of the deceased’s personal representatives who are non‑UK resident in their own capacity are to be treated as UK resident in their capacity as personal representatives of the deceased. See subsections (2) and (3).
2506.If the condition in subsection (3) is not met in relation to the deceased, any of the deceased’s personal representatives who are UK resident in their own capacity are to be treated as non‑UK resident in their capacity as personal representatives of the deceased. See subsection (4).
2507.The provision in section 111(1)(b) of FA 1989 that a personal representative who is treated as non‑UK resident under that paragraph is also to be treated as resident outside the United Kingdom is included in Chapter 2 of Part 13 (see the commentary on section 718). The provisions of section 111(7) and (8) of FA 1989, relating to the effect of that rule on liability under sections 739 and 740 of ICTA, are included in Part 14 of Schedule 2.
2508.The definition of “personal representatives” in section 111(3) of FA 1989 has been omitted. Instead, the general Income Tax Acts definition of “personal representatives” in section 989 applies to this section. See Change 150 in Annex 1 and the commentary on section 989.
Section 835: Residence rules for trustees and companies
2509.This section provides signposts to other provisions relating to residence, not included in this Chapter. It is new.
2510.Those provisions are:
sections 475 and 476 of this Act which contain rules for determining the residence of trustees and
sections 66 and 66A of FA 1988 and section 249 of FA 1994 which contain rules for determining the residence of a company.
2511.The provisions in FA 1988 and FA 1994 do not form part of this Act, as they apply not only for the purposes of the Tax Acts but also for the purposes of TMA and of TCGA and all other enactments relating to capital gains tax.
2512.In relation to a company, this section is to be read with section 5 which provides that income tax is not charged on the income of a company if the company is within the charge to corporation tax in respect of the income. That section contains a signpost to sections 6(2) and 11(1) of ICTA for the circumstances in which a company is within the charge to corporation tax in respect of its income. Those circumstances in turn depend upon the residence of the company.
Chapter 3: Jointly held property
Overview
2513.These sections rewrite the rules in sections 282A and 282B of ICTA that apply to income arising from property held in the joint names of a husband and wife or civil partners who are living together. In general, the effect of the rules is that such income is allocated equally between the parties.
2514.There are no specific rules dealing with the allocation of income arising from property owned jointly by other persons. If assets are held in common so that each party has a specific share, then the allocation of income would normally reflect those shares. And if assets are held by joint tenants, then in law each person owns the whole of the property and is entitled to the whole of the income. But in practice such income is not subject to double assessment and is normally allocated equally.
Relevance of “earned income”
2515.The term “earned income” has a long history. It is defined in section 833(4) to (6) of ICTA, and subsection (6) indicates that there are a number of further provisions under which certain sorts of income are treated as earned.
2516.Following the changes made to pensions tax legislation in FA 2004 which came into force on 6 April 2006, section 282A of ICTA is now the only place in the Income Tax Acts which makes specific use of the term earned income. (And it is not used in relation to national insurance purposes.) There is a single reference to patent income within section 833(5B) of ICTA, in the definition of “relevant UK earnings” in section 189(2)(c) of FA 2004.
2517.Rather than retain this concept, the joint property rule is rewritten in direct terms without reference to earned income, mainly by excluding all income within Part 9 of ITTOIA from the joint property rule. Accordingly, it is no longer necessary to define earned income, and specific provisions treating income as earned are repealed by this Act. In addition, the reference to section 833(5B) of ICTA in section 189 of FA 2004 is amended by Schedule 1 to this Act. See Change 125 in Annex 1.
Section 277 of ICTA
2518.This section, dating in part from 1842, also relates to income arising from jointly owned property. It is not related to sections 282A and 282B. It is instead about how personal reliefs may be claimed against income arising from jointly owned property. As there is no longer any form of joint assessment of income belonging to more than one person, this provision is otiose and has not been rewritten.
Section 836: Jointly held property
2519.This section provides the general rule (the 50:50 rule) that income from jointly held property is allocated equally between the spouses or civil partners. It is based on section 282A of ICTA.
2520.Subsection (1) explains that the section applies to married couples and civil partners provided that they live together. The meaning of “living together” is explained in section 1011.
2521.Subsection (2)gives the general rule and subsection (3) provides exceptions.
2522.Exception A relates to income to which neither of the individuals is beneficially entitled. It follows that the 50:50 rule does not apply when the couple hold the property as nominees or trustees.
2523.Exception B applies where the couple own property in common in unequal shares and make a declaration under section 837.
2524.Exception C applies to all income that arises to the individuals as partners. This exception covers not only income arising from a trade or profession carried on in partnership, but any other business income arising to a firm. See Change 125 in Annex 1 and the overview commentary on this Chapter.
2525.Exception D applies to the commercial letting of furnished holiday accommodation, which is treated as a trade. See Change 125 in Annex 1 and the overview commentary on this Chapter.
2526.Exception E is based on section 282A(4A) of ICTA. It ensures that if close company shares or securities are held in common, income arising from that property is allocated according to true beneficial ownership rather than equally.
2527.Exception F ensures that the rule in subsection (2) does not apply to income that is treated as the income of the other individual or a third party under any other provision of the Income Tax Acts.
Section 837: Jointly held property: declarations of unequal beneficial interests
2528.This section enables couples to specify that the 50:50 rule does not apply to income arising from particular property held in common, so that the income is then allocated according to each individual’s beneficial interest. It is based on sections 282A and 282B of ICTA.
2529.A declaration can only be made where the entitlement of each individual to a share in the income matches the entitlement to his or her share in the underlying property (subsection (1)).
Chapter 4: Other miscellaneous rules
Overview
2530.This Chapter contains miscellaneous income tax provisions.
Section 838: Local authorities and local authority associations
2531.This section exempts United Kingdom local authorities and local authority associations from income tax. It is based on section 519 of ICTA.
Section 839: Issue departments of the Reserve Bank of India and the State Bank of Pakistan
2532.This section exempts from income tax the income of the issue departments of the central banks of India and Pakistan. It is based on section 517 of ICTA.
Section 840: Government securities held by non-UK resident central banks
2533.This section exempts from income tax certain income arising in the United Kingdom to overseas central banks. It is based on section 516 of ICTA.
2534.The scope of the exemption is specified in an order made by Her Majesty in Council. It does not extend to income arising in the normal course of a bank’s trading operations in the United Kingdom.
Section 841: Official agents of Commonwealth countries etc
2535.This section provides an exemption from income tax for certain income arising to official agents of Commonwealth countries and of the Republic of Ireland and of states or provinces of those countries. It is based on section 320(2) to (4) of ICTA.
2536.The exemption is the same as that given to members of the staff of a diplomatic mission under the Diplomatic Privileges Act 1964 which gives force to the United Kingdom’s international obligations under the Vienna Convention on Diplomatic Relations. In most cases, provided the agent is not a United Kingdom national and is present in the United Kingdom solely for the purpose of the agent’s duties, that is an exemption for the agent’s official earnings and other income arising outside the United Kingdom. Private income arising in the United Kingdom remains liable to income tax.
2537.Section 320(1) of ICTA provides an exemption to an Agent-General and section 320(3)(a) an exemption to his or her personal staff. These exemptions have not been rewritten as they merely duplicate exemptions now given under the Commonwealth Countries and Republic of Ireland (Immunities and Privileges) Order SI 1985/1983.
2538.Section 320(3)(c), which provides an exemption to an official agent of a self-governing colony, has not been rewritten because there are no overseas territories now certified as self-governing colonies.
Section 842: European Economic Interest Groupings
2539.This section sets out the basic rules that determine how the members of a European Economic Interest Grouping are to be taxed. It is based on section 510A of ICTA to the extent that it relates to income tax.
2540.Members of a Grouping may be companies, individuals or partnerships.
Section 843: Restriction of deductions for annual payments
2541.This section prevents annual payments for which the consideration is either a dividend or not taxable from being deducted in calculating a person’s income from any source. It is based on section 125(1) of ICTA.
2542.Section 899(5)(f) prevents the annual payments concerned from being qualifying annual payments. So they are not subject to deduction of tax at source, nor eligible for relief under Chapter 4 of Part 8 (annual payments and patent royalties). This section extends the ban on relief so that no annual payment that meets the definition in section 904 is an allowable deduction in calculating income in any circumstances.
Section 844: Letters patent etc: exempting provisions
2543.This section voids the impact of exempting provisions in letters patent. It is based on section 829(4) of ICTA.
2544.The words “to be granted” in the source legislation have been omitted as it is not possible for an exemption to be in point until the letters patent are actually granted.
2545.Subsection (3) is drafted on the basis that purported exemptions in all letters patent etc are void.
2546.Section 829(4) of ICTA also contains the rule that any statute which purports to confer income tax exemptions on a particular person or class of persons is void. It is not considered that “statute” can have its modern meaning of “Act of Parliament”, since it is always open to Parliament to enact specific tax exemptions if it chooses to do so. It is instead aimed at provisions of a quasi-legislative nature such as bye-laws. But the idea of a local rule overriding an Act of Parliament by providing an income tax exemption is no longer tenable. So this part of section 829(4) is repealed as obsolete.
Section 845: Extra return to be treated as interest etc
2547.This section treats as interest certain “extra returns” that arise in some circumstances if new securities are issued of the same kind as existing securities. It is based on section 587A(1) to (3) of ICTA.
2548.The section applies where new securities are issued which are of the same kind as existing securities, except that at the issue date the existing securities will have accrued a certain amount of interest. In order to pay the same amount of “interest” on all the securities at the next interest payment date, the issue price of the new securities is increased to reflect the accrued interest on the existing securities. This section contains special rules for the treatment of the amount by which the issue price is increased.
2549.Subsection (1) sets out the conditions that must be met for the provision to operate. The total amount by which the issue price of the new securities is increased and which is then returned to the holder along with the true interest on the securities at the next interest payment date is called the “extra return”.
2550.Subsection (2)specifies that the extra return must be equal to the interest that accrued for the relevant period on an equivalent number of existing securities. The relevant period is defined in section 846.
2551.Subsection (3) ensures that the extra return is treated as a payment of interest. It then follows that where deduction of tax applies, it will apply to the whole amount of “interest” including the extra return.
2552.Subsection (4) ensures that no relief is given to the issuer for the extra return.
2553.For corporation tax purposes, section 587A of ICTA applies only if the new securities were issued before 1 April 1996. Accordingly, this provision has not been retained for corporation tax purposes.
Section 846: Interpretation of section 845
2554.This section provides definitions for terms used in section 845. It is based on section 587A(3) to (6) of ICTA.
[1985] STC 323
[1989] STC 473
