Section 778: Income arising where capital amount other than derivative property or right obtained
2291.This section applies if the capital amount mentioned in section 777(5) does not consist of either property which derives substantially the whole of its value from the individual’s activities or a right which does so. It is based on sections 775(1), (2) and (7) and 777(13) of ICTA.
2292.If section 778 applies, subsection (2) treats the capital amount as income.
2293.Subsection (2) omits the reference in section 775(2) to the capital amount being treated as “earned income”. The only place in the Income Tax Acts where the expression “earned income” is used, following the reform of the pensions legislation in FA 2004, is section 282A of ICTA (jointly held property). As explained in the commentary on Chapter 3 of Part 14, section 282A has been rewritten in direct terms without reference to earned income. Accordingly, this section does not refer to earned income either.
2294.HMRC’s interpretation of the territorial scope of section 775 of ICTA is summarised in the table below.
| Taxpayer’s residence | Where occupation is carried on | Application of section 775 |
|---|---|---|
| UK | Wholly in the United Kingdom | Section 775 applies (assuming all the other conditions are met). |
| UK | Wholly outside the United Kingdom | Section 775 does not apply. |
| UK | Partly in the United Kingdom, partly outside the United Kingdom | Section 775 applies to the whole of the gain (assuming all the other conditions are met). |
| Non-UK | Wholly in the United Kingdom | Section 775 applies (assuming all the other conditions are met). |
| Non-UK | Wholly outside the United Kingdom | Section 775 does not apply. |
| Non-UK | Partly in the United Kingdom, partly outside the United Kingdom | Section 775 applies (assuming all the other conditions are met), but only to the capital amount attributable to that part of the occupation carried on in the United Kingdom. |
2295.The sections reflect this interpretation, and make a minor change in the law (although not in practice) to clarify the territorial scope of section 775. See Change 115 in Annex 1.
2296.At first sight, section 775(9) of ICTA (“This section shall apply to all persons …”) seems to apply to the “other person” mentioned in section 775(1)(a) of ICTA. But, to the extent that section 775(9) of ICTA applies to the “other person”, it is redundant. To that extent, therefore, it is repealed without replacement.
