4(1)For the purposes of this Chapter, the distributable income of a company for an accounting period shall be the amount of its distributable profits for the period exclusive of the part attributable to chargeable gains; and for the purposes of this sub-paragraph—
(a)the distributable profits of a company for an accounting period shall be the aggregate of the following amounts, that is to say—
(i)the amount of any profits on which corporation tax falls finally to be borne, less the amount of that tax;
(ii)an amount equal to the qualifying distributions comprised in any franked investment income, other than franked investment income against which relief is given under section 242 or 243; and
(iii)an amount equal to any group income;
(b)the part of a company’s distributable profits attributable to chargeable gains shall be taken to be the amount of the chargeable gains on which corporation tax is finally borne less the amount of that tax; and
(c)the amount on which corporation tax falls finally to be borne (but not the amount of that tax) shall be computed as if section 242 did not include subsection (5) or (6) of that section (and as if section 243 did not apply section 242(5));
and for the purposes of sub-paragraph (a)(ii) above relief under section 242 or 243 shall be treated as having been given first against franked investment income which is not trading income and secondly, so far as it cannot be so given, against franked investment income which is trading income.
(2)For the purposes of this Chapter, the distributable investment income of a company for an accounting period shall be the amount of the distributable income, exclusive of the part attributable to estate or trading income, and less whichever is the smaller of—
(a)10 per cent. of the estate or trading income; and
(b)£1,000 or, if the company is a trading company or a member of a trading group, £3,000 or (in either case) if the accounting period is of less than 12 months, a proportionately reduced amount.
5(1)For the purposes of this Chapter, “estate or trading income” means estate income and trading income.
(2)For those purposes “estate income” means income which is chargeable to tax under Schedule A or Schedule B, and income (other than yearly or other interest) which is chargeable to tax under Schedule D, and which arises from the ownership or occupation of land (including any interest in or right over land) or from the letting furnished of any building or part of a building, but does not include trading income.
(3)For those purposes “trading income” means income which is not investment income for the purposes of paragraph 7(1) below; and, where the following conditions are satisfied with respect to a close company, that is to say—
(a)that its activities consist wholly or mainly of the carrying on of a trade; and
(b)that the trade consists wholly or mainly of one or more of the following, that is to say, life assurance business (within the meaning of section 431), insurance business of any other class, banking, money lending, financing of hire-purchase or similar transactions, or dealing in securities;
its income incidental to that trade shall also be trading income.
(4)For the purposes of sub-paragraph (3) above income of a company is incidental to its trade if, and only if—
(a)it is derived from investments (other than investments in a 51 per cent. subsidiary) or is interest on a debt; and
(b)any profit on the sale of the investments would be a trading receipt, and the debt, if proved to be a bad debt, would be allowed as a deduction in computing the company’s trading income for the purposes of corporation tax.
6(1)The amount for part of an accounting period of any description of income referred to in paragraph 4 or 5 above shall be a proportionate part of the amount for the whole period.
(2)In determining the amount for any period of any description of income referred to in paragraph 4 or 5 above, any deduction from the company’s profits for charges on income, expenses of management or other amounts which can be deducted from or set against or treated as reducing profits of more than one description shall be treated as made—
(a)first, from the company’s income charged to corporation tax other than estate or trading income;
(b)secondly, so far as it cannot be made under paragraph (a) above, from the company’s estate or trading income so charged;
(c)thirdly, so far as it cannot be made under paragraph (a) or (b) above, from the amount included in the company’s profits in respect of chargeable gains.
(3)In the application of sub-paragraph (2) above to a company which is a trading company or a member of a trading group there shall be substituted for paragraph (b) the following paragraphs—
“(b)secondly, so far as it cannot be made under (a) above, from the company’s estate income so charged;
(bb)thirdly, so far as it cannot be made under (a) or (b) above, from the company’s trading income so charged;”
and in paragraph (c) for “thirdly” there shall be substituted “fourthly”, and for “(a) or (b)” there shall be substituted “(a), (b) or (bb)”.