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 Accordingly, it is no longer necessary to define earned income, and specific provisions treating income as earned are repealed by this Act.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.
