2348.This section describes the function and contents of the Part. It is new.
2349.This section sets out the charge to corporation tax on dividends from a company that is not resident in the UK. It is based on sections 9, 18 and 70 of ICTA. The corresponding income tax provision is section 402 of ITTOIA.
2350.The approach adopted in ICTA is to compute income for corporation tax from each type of source in the same way as for income tax, and then apply any specific corporation tax rules. Following the enactment of ITTOIA, which set up a different scheme for income tax, sources of income for corporation tax have continued to be computed under the rules of the separate Schedules and Cases. Dividends paid by a non-UK resident company were charged under Schedule D Case V.
2351.The section mirrors section 402 of ITTOIA by explicitly excluding capital dividends – the Schedule D Case V charge was a charge on income and the wording of the section reflects this.
2352.This Chapter charges to corporation tax income paid or payable by personal representatives to residuary beneficiaries from estates in administration. The Chapter rewrites sections 695 to 702 of ICTA. The corresponding rules for income tax are in Chapter 6 of Part 5 of ITTOIA.
2353.Personal representatives are taxable at the basic rate or the dividend ordinary rate on any income they receive during the administration period. When the income which arises to the personal representatives is paid to the residuary beneficiaries, it is treated as having borne income tax at those rates.
2354.This section applies the charge to corporation tax on income to estate income. It is based on sections 695(2) to (4), 696(3) and (6), 698(3) and 701(11) of ICTA. The corresponding rule for income tax is in section 649 of ITTOIA.
2355.The approach of Part 16 of ICTA is to deem sums to have been paid as income for all tax purposes. In the case of both UK and foreign estates, the income is not charged under a particular Schedule or Case and it is implicit that tax is charged on those sums. This section applies to both UK and foreign estates. And it has now been made explicit that the charge to tax applies to all estate income which is treated as arising under the Chapter from a deceased person’s estate.
2356.This section defines the three types of interest in the whole or part of the residue of an estate. It is based on sections 698(1) and (3) and 701(2) and (3) of ICTA. The corresponding rule for income tax is in section 650 of ITTOIA.
2357.Subsections (1)(b) and 2(b) reflect the fact that the amount of any residue, and the income from it, can only be an estimate until the residue has been ascertained.
2358.Subsection (4) covers the following four situations:
where income/capital is properly payable directly to the person with the interest;
where income/capital is properly payable to the person with the interest indirectly through a trustee or other person;
where income/capital is properly payable for the benefit of the person with the interest, to another person, and that income/capital is paid directly to that other person; and
where income/capital is properly payable to a person where that person is a personal representative and subsection (5) applies.
2359.Subsection (5) deals with the situation where personal representatives would have an absolute or limited interest in the residue of another deceased person’s estate if a right they have as personal representatives were vested in them for their own benefit. In these circumstances they are treated as having that interest. The term “personal representatives” is defined in section 968. The definition corresponds with that in section 989 of ITA.
2360.This section defines “UK estate” and “foreign estate” for the purposes of this Chapter. It is based on sections 699A(1B) and 701(9), (10) and (10A) of ICTA. The definitions in this section underpin the whole of this Chapter. The corresponding rule for income tax is in section 651 of ITTOIA.
2361.This section sets out the basis on which estate income is treated as arising in an accounting period in the case of absolute interests in residue. It is based on section 696(3) and (5) of ICTA. The corresponding rule for income tax is in section 652 of ITTOIA.
2362.Subsections (2) and (3) set out the relevant conditions. A payment need not be made in the “final accounting period” because the net amount of estate income in that period is always equal to the assumed income entitlement for that period. Under section 696(5) of ICTA, taxing a company with an absolute interest in a residuary estate depends on whether the company receives payments and, in the final year of administration, on a fictional payment under that section. The same effect is achieved in this section by determining the liability by considering the assumed income entitlement in all accounting periods. Assumed income entitlement is dealt with in section 948.
2363.This section defines “the administration period”, “the final accounting period” and “the final tax year”. It is based on sections 695(1), 701(13) and 702 of ICTA. The corresponding rule for income tax is in section 653 of ITTOIA.
2364.Subsection (2) defines when the administration of the estate is completed for Scotland. A full definition for Scotland is required because the completion of the administration of an estate would otherwise have no meaning under Scottish law (although the definition has been updated by replacing the archaic expression “for behoof of”). In contrast, there are cases under English law which have established that the administration is complete when the residue of the estate is ascertained and is ready for distribution. Case law explains what this means in particular circumstances (see, for example, R v Special Commissioners ex parte Dr Barnardo’s Homes (1921), 7 TC 646 HL, Daw v CIR (1928), 14 TC 58 HC and CIR v Sir Aubrey Smith (1930), 15 TC 661 CA).
2365.This section deals with estate income relating to limited interests. It is based on section 695(2) and (3) of ICTA. The corresponding rule for income tax is in section 654 of ITTOIA.
2366.The section sets out the basis on which estate income is treated as arising in an accounting period for limited interests in residue. The section reflects the need to deal with accounting periods before the final accounting period. Also, a limited interest might cease in an accounting period before the final accounting period and sums might be paid in respect of that interest in a later accounting period; so that situation has to be provided for.
2367.This section deals with estate income relating to discretionary interests in residue. It is based on section 698(3) of ICTA. The corresponding rule for income tax is in section 655 of ITTOIA.
2368.This section sets out the amount charged to tax under section 934 for income from UK estates. It is based on sections 695(2) to (4), 696(3) and (4) and 698(3) of ICTA. The corresponding rule for income tax is in section 656 of ITTOIA.
2369.As there are fundamental differences between the basis of charge for income from UK and foreign estates, the rules for foreign estates have been dealt with in a separate section (section 942).
2370.Subsection (2) provides that income from a UK estate is charged on the gross amount of the estate income arising for the accounting period. This is the basic amount of the income grossed up at the applicable rate. “Basic amount” is a new term. This avoids confusion with the term “net amount” since it is the “net amount” which is actually charged to tax in the case of a foreign estate (except where section 963 (income treated as bearing income tax) applies).
2371.This section sets out the amount charged to tax under section 934 for income from foreign estates. It is based on sections 695(4), 696(6) and 698(3) of ICTA. The corresponding rule for income tax is in section 657 of ITTOIA.
2372.Subsection (5) provides that, so far as the income is not within section 963, the charge is on the basic amount of that income. Where the income is within section 963, the charge is on the gross amount of the income calculated in accordance with section 946.
2373.This section explains how to calculate the basic amount of estate income for absolute interests. It is based on section 696(3) to (5) of ICTA. The corresponding rule for income tax is in section 660 of ITTOIA.
2374.This section removes all the deeming of amounts to have been paid in Part 16 of ICTA. Instead, it looks at either amounts actually paid or the assumed income entitlement. It then catches all previously untaxed income due to the absolute interest holder by taxing the assumed income entitlement in the final accounting period. This avoids the two stage process inherent in section 696(5) of ICTA.
2375.Subsection (3) introduces a new rule allowing excess estate deductions in the final year to be set off against the basic amount of estate income for the final accounting period. See Change 69 in Annex 1.
2376.This section explains how to calculate the basic amount of estate income for limited interests. It is based on section 695(2) to (4) of ICTA. The corresponding rule for income tax is in section 661 of ITTOIA.
2377.This section identifies the basic amount of estate income relating to discretionary interests. It is based on sections 695(4) and 698(3) of ICTA. The corresponding rule for income tax is in section 662 of ITTOIA.
2378.This section provides for basic amounts of estate income to be grossed up, as appropriate, for the purposes of the sections charging income (section 941 for UK estates and section 942 for foreign estates) by reference to the rate at which tax is borne by the aggregate income of the estate. It is based on sections 699A and 701(3A) of ICTA. The aggregate income of the estate is defined in section 947. The corresponding rule for income tax is in section 663 of ITTOIA.
2379.Subsection (5) explains the interaction between “the relevant tax year” and “accounting period” for the purposes of this Chapter.
2380.This section explains what is meant by the “aggregate income of the estate” for a tax year. It is an important definition of general application. It is based on sections 701(5) and (8) and 702 of ICTA. The corresponding rule for income tax is in section 664 of ITTOIA.
2381.Subsection (2) defines the income and amounts within the aggregate income of the estate. Subsection (2)(b) brings in foreign source income and subsection (4) provides that such income takes account of any deductions which would have been available if it had been subject to United Kingdom income tax. So subsection (4) brings foreign source income into line with United Kingdom source income.
2382.Subsection (5) provides that two types of income are excluded from the aggregate income of the estate. The exclusion detailed in subsection (5)(a) concerning income to which any person may become entitled under a specific disposition is new to the definition of the aggregate income of the estate although it is similar to section 697(1)(b) of ICTA which deals with amounts which are deductible from the aggregate income in calculating the residuary income of the estate.
2383.It is not considered appropriate for income from specific dispositions or income from contingent interests to be treated as part of the aggregate income of the estate. See Change 70 in Annex 1.
2384.Section 698(1) of ICTA in part deals with the position where the deceased person (“A”), whose estate is being administered by personal representatives, had an absolute or limited interest in the residue of the estate of another deceased person (“B”). Section 698(1) of ICTA deems the personal representatives to have the same interest as “A” “notwithstanding that that right is not vested in them for their own benefit”. The substance of this is rewritten in section 935(5). Section 698(1) of ICTA also deems any income in respect of such an interest to be part of the aggregate income of A’s estate. This part of the source legislation is not rewritten because such income will fall within the definition of the aggregate income of the estate anyway, once the personal representatives are deemed to have the interest, because it will be the income of the deceased’s personal representatives as such. It is immaterial for this purpose that that right in relation to the estate of another deceased person “is not vested in them for their own benefit”.
2385.It is not necessary to expand on the two types of excluded income mentioned in subsection (5) of this section (with the exception of subsection (6) of this section) since it will be clear when such income arises. Consequently, section 701(6) and (7) of ICTA (which provide the meaning for “charges on residue”) are not rewritten.
2386.This section explains the new concept of the “assumed income entitlement”. It is based on section 696(3A), (3B) and (5) of ICTA. The corresponding rule for income tax is in section 665 of ITTOIA.
2387.The concept of “assumed income entitlement” has been introduced as a tool for calculating the basic amount of estate income for absolute interests. It is similar to the “aggregated income entitlement” in section 696(3B) of ICTA but applies in a more straightforward way.
2388.Step 4 in subsection (1) deals also with situations where a beneficiary liable to corporation tax was, at some earlier point during the administration period, chargeable to income tax. It also deals with other situations where a non-UK resident beneficiary becomes UK resident, when the estate is a foreign estate.
2389.This section explains how the residuary income of the estate is calculated. It is based on section 697(1) and (1A) of ICTA. The corresponding rule for income tax is in section 666 of ITTOIA.
2390.Beneficiaries with absolute interests need to know the residuary income of the estate for a tax year in order to work out their assumed income entitlement.
2391.Subsection (2) lists the “allowable estate deductions”. This is a new label for the items which may be deducted from the aggregate income of the estate. Subsection (2)(a) refers to “all interest paid in that year by the personal representatives …”. Section 697(1)(a) of ICTA refers to “the amount of any annual interest, annuity or other annual payment for that year which is a charge on residue …”. The requirements that interest must be annual and also a charge on residue have not been reproduced. See Change 71 in Annex 1.
2392.In practice, HMRC allow income from specific dispositions to be deducted from the aggregate income of the estate in calculating the residuary income of the estate in the year of assent and later years. But it is considered simpler for it merely to be excluded from what counts as the aggregate income and not be deducted from it. See Change 70 in Annex 1.
2393.Subsection (2)(b) deals with annual payments. Because of the restricted meaning given to annual payments, much of the wide definition in sections 701(6) and 702(d) of ICTA is otiose. Any liabilities which are annual payments will now have to meet only the requirement that they are properly payable out of residue and this is also a requirement of section 701(6) of ICTA. Omitting the remainder of the definition removes unnecessary material. As a consequence of the change, section 701(7) of ICTA, which limits the meaning of “charges on residue” in relation to specific dispositions, does not need to be rewritten either.
2394.The section does not contain an ordering rule for allocating allowable estate deductions against different categories of income. It is implicit in this section that the taxpayer may choose whichever allocation is most advantageous.
2395.This section explains the rules for determining the share of residuary income treated as arising from a company’s absolute interest in the whole or part of the residue of an estate. It is based on section 696(2) and (8) of ICTA. The corresponding rule for income tax is in section 667 of ITTOIA.
2396.This section provides that the share of the residuary income of the estate of a company with an absolute interest is reduced at the end of the administration period in certain circumstances. It is based on section 697(2) and (3) of ICTA. The corresponding rule for income tax is in section 668 of ITTOIA.
2397.Until it was repealed by ITA 2007, section 4(1) of ICTA provided that sums paid during (or on completion of) the administration period were to be grossed up by reference to the basic rate for the tax year in which it was paid in the case of UK estates. Subsection (5) provides that, for the purposes of subsection (1)(b) the basic rate is used when grossing up these sums. See Change 72 in Annex 1.
2398.This section sets out the calculation of the applicable rate for the purposes of calculating income tax to be deducted from the residuary income at step 2 of section 948(1). The section is based on section 701(3A) of ICTA. The corresponding rule for income tax is in section 670 of ITTOIA.
2399.This section introduces the sections dealing with successive interests where two or more interests in the whole or part of the residue of an estate are held successively during the administration period by different persons. It is based on section 698(4) to (6) of ICTA. The income tax rules corresponding to subsections (2) and (3) are rewritten in section 671(7) and (8) of ITTOIA.
2400.Subsection (3) ensures that where a previous holder is not a company within the charge to corporation tax, that person’s accounting periods (for the purposes of this section) correspond with tax years.
2401.This section explains the position where two or more absolute interests in the residue of an estate are held successively by different persons. It is based on sections 697(4) and (5), and 698(2) of ICTA. The corresponding rule for income tax is in section 671 of ITTOIA.
2402.Subsection (3) contains an ordering rule to ensure that all determinations under subsection (2) or section 955(2) are made in relation to the person with the earlier interest before the person with the later interest. This subsection has been inserted to make explicit what is already implicit in the source legislation.
2403.Subsection (4) provides a special rule where there are two or more absolute interests in the final accounting period. It is intended to ensure that it is the last absolute interest which is charged to tax on the assumed income entitlement, which will comprise all the residuary income, in the final accounting period. This is because the last absolute interest holder will receive the capital of the residue (and also all outstanding income in respect of it).
2404.Subsections (5) and (6) contain special rules where section 951 (reduction in share of residuary income of estate) applies and there are successive absolute interests. These subsections provide that the calculation under section 951(1)(a) and (b) is to be made by reference to all the absolute interests taken together. Then, after applying the reduction to the last absolute interest under section 951(2) and (3), any remaining excess is applied to the previous absolute interest holders working backwards from the beginning of the last interest. See Change 73 in Annex 1.
2405.This section and section 956 explain the position of the absolute interest holder where successive limited and absolute interests in the residue of an estate are held by different persons. It is based on section 698(1A) and (1B) of ICTA. The corresponding rule for income tax is in section 672 of ITTOIA.
2406.The section applies only where the later interests arise or are created on the cessation of the previous interest otherwise than by death. The position of limited interests which cease on the death of the holder before the final tax year are dealt with in section 654 of ITTOIA and section 939 of this Act. All sums paid or remaining payable in respect of that interest after the tax year of death are treated as estate income arising in the tax year of death.
2407.Examples of situations, in relation to limited interests, that are covered by the section include:
the disclaiming of a life interest which accelerates an existing interest under the will; and
an interest which is only held until marriage or attaining a certain age.
2408.Subsections (3) and (4) contain the two rules introduced by subsection (2). They deal with the limited interest which ceases otherwise than on death. They also explain how such an interest is brought into the calculation of whether the person with the absolute interest has an assumed income entitlement and, if so, its amount. The assumed income entitlement works on a cumulative basis, so the share of the residuary income of the absolute interest holder and the basic amounts of previous accounting periods are taken into account.
2409.This section covers the position where the absolute interest holder is entitled to receive payments in respect of a preceding limited interest which has ceased otherwise than on death. It is based on section 698(1A) and (1B) of ICTA. The corresponding rule for income tax is in section 673 of ITTOIA.
2410.Subsection (2) deals with such payments while the absolute interest holder still has the absolute interest. It provides that a payment made to the absolute interest holder in respect of the limited interest is treated as paid in respect of the absolute interest (and not the limited interest). Thus, such payments may form part of the basic amount of estate income in accounting periods before the final accounting period.
2411.Subsection (3) deals with the position where the holder’s absolute interest has itself ceased (but the administration period continues). The approach here is to treat any such sum paid in these circumstances as a payment in respect of the earlier limited interest. The result is that such payments are treated as estate income under the limited interests provisions. But subsection (6) provides that the payments are treated as paid or payable in respect of the absolute interest for the purposes of section 951 (reduction in share of residuary income of estate).
2412.The taxation of successive interests in the residue of an estate is dealt with in section 698(1A) to (2) of ICTA. Section 698(1B) of ICTA deals with the case where there were successive interests in an estate which ceased otherwise than on death and the earliest or one of the earlier interests was a limited interest (see section 698(1A) of ICTA).
2413.Section 698(1B)(a) of ICTA provides that Part 16 of ICTA applies as if all the interests were the same interest (“the deemed single interest”), so that none of them is to be treated as having ceased on being succeeded by any of the others. Section 698(1B)(b) of ICTA then determines who had the deemed single interest. It is either the person in respect of whose interest or previous interest the payment was made (section 698(1B)(b)(i) of ICTA) or a person who has or had an interest and is entitled to receive the payment (section 698(1B)(b)(ii) of ICTA). So a beneficiary who does not give up his or her entitlement to income which is unpaid at the time the interest ceases is taxable on the payment, rather than the person holding the successive interest at the time when the payment is made. However, section 698(1B)(b) of ICTA is made subject to section 698(1B)(c) of ICTA. Section 698(1B)(c)(i) of ICTA provides that, so far as a later interest is an absolute interest, it is to be treated as having always existed and the earlier interest or interests as having never existed for the purposes of the provisions dealing with absolute interests in section 696(3A) to (5) of ICTA.
2414.In rare circumstances the later absolute interest may itself have ceased at the time the payment is made. For example, A has a limited interest which is succeeded by absolute interests held first by B and then by C, and a payment is received by B in respect of A’s earlier limited interest after B’s own interest has ceased but before the end of the administration period. As a result of section 698(1B)(b)(ii) of ICTA, Part 16 of ICTA applies to the payment as if B had the deemed single interest. So section 696(3) of ICTA deems the sum to be paid to B as income in the accounting period in which it is actually paid. That is an accounting period in which C had the absolute interest. Under section 698(1B)(c)(i) of ICTA for the purposes of section 696(3A) to (5) of ICTA, Part 16 of ICTA is to apply as if the later interest of C had always existed and the earlier interests had never existed. Section 698(1B)(c)(ii) and (iii) of ICTA then provides that sums paid as income in respect of the earlier interests are deemed to be sums paid in respect of the later interest of C.
2415.The relationship between these particular provisions, where the later interest has itself ceased at the time the payment is made but the administration period continues, is difficult to work out. It would seem that the payment in the above example should be taxed on B because of section 696(3) of ICTA. The payment is then brought into account when the payments made in respect of C’s interest are compared to its aggregated income entitlement (in making the final year calculation under section 696(5) of ICTA in respect of C’s interest to determine whether any amount should be treated as having been paid to C immediately before the end of the administration period). So although section 698(1A) and (1B) of ICTA operate in a very convoluted way in the above circumstances, the end result appears to be that B, the person with the absolute interest who receives the payment, is taxed on it, but it does not affect B’s aggregated income entitlement.
2416.In order to spell out how a payment made in these circumstances should be treated, subsections (3) and (4) of this section provide that where such a payment is made, this Chapter applies as if the earlier limited interest had continued to subsist while the later absolute interest subsisted and had been held by the holder of the later absolute interest. The result is that payments to that holder are treated as estate income under the provisions about limited interests.
2417.Sums to which that holder is entitled that remain payable at the end of the administration period are treated in the same way. They will be basic amounts arising from the limited interest in the accounting period in which the absolute interest ceases and are dealt with by sections 939 and 944. The effect of this on later absolute interests is then determined by the successive absolute interests provisions in section 954. Under subsection (6) of this section, however, these sums are to be treated as paid or payable in respect of the absolute interest for the purposes of the provisions about the reduction in shares of residuary income under section 951.
2418.This section explains the position of a limited interest holder where successive interests in the residue of an estate are held by different persons and the earlier, or if there are more than two, the earliest of the interests is a limited interest. It is based on sections 695(2) and (3) and 698(1A) and (1B) of ICTA. The corresponding rule for income tax is in section 674 of ITTOIA.
2419.The section only applies where the later interests arise or are created on the cessation of the previous interest otherwise than by death.
2420.Subsections (3) to (5) cover three sets of circumstances described as “cases” where the estate income in respect of successive limited interests is treated as arising. The cases are the equivalent for successive limited interests of the three cases for single limited interests in section 939. But the section recognises that there may be more than one limited interest in the chain of succession, so references are made to “one of the interests” and subsection (5) refers to “the last of the successive interests”.
2421.There is also an additional sub-paragraph in each case providing that a limited holder (as defined) is entitled to receive the payment. This reflects the fact that the person who receives the payment in these circumstances is not always the person in respect of whose interest the payment is made. For example, on disclaiming a life interest, a beneficiary may also disclaim any entitlement to income accrued in respect of that interest but not yet paid.
2422.The section does not make it explicit that a new chain of succession begins with the first limited interest (and a previous absolute interest is ignored) for the purposes of this provision. Nor does the section make it explicit that two limited interests which are preceded by a limited interest which ceased on the death of the beneficiary are covered by the section. These conclusions are implicit in this section.
2423.This section explains how to calculate the net amount of estate income for successive limited interests. It is based on sections 695(2) to (4) and 698(1A) and (1B) of ICTA. The corresponding rule for income tax is in section 675 of ITTOIA.
2424.The section is the equivalent provision to section 944 for limited interests that are not successive.
2425.This section applies where successive interests apply to only part of the residue. In other words, the residuary estate is divided up and one or more of the successive interests provisions apply to a part or parts of that estate. It also applies where one of the interests covers the whole estate and the other interest covers part of it. It is new. The corresponding rule for income tax is in section 676 of ITTOIA. See Change 74 in Annex 1.
2426.In such circumstances, it is possible that a subsequent interest may not cover exactly the same part of the residuary estate as the interest which preceded it. For example, limited interest holders may give up half their interest, thus accelerating the interest of the absolute interest holder. Only half the share of the residuary income and half the net amounts of the limited interest holder would be needed for the calculation of whether the absolute interest holder has an assumed income entitlement in accordance with section 955(2). The section provides for just and reasonable apportionments to be made in these circumstances.
2427.This section provides for relief if income, which has borne United Kingdom tax, arises to a company with an absolute interest in the residue of a foreign estate. It is based on section 696(7) of ICTA. The corresponding rule for income tax is in section 677 of ITTOIA.
2428.Subsection (2) contains the formula for calculating the relief where a claim is made. The labels in section 696(7)(a) and (b) of ICTA – “the deemed income” and “the aggregate income” respectively – were added as explanatory aids in the course of the ICTA consolidation. These labels are not retained.
2429.This section provides for relief if income, which has borne United Kingdom tax, arises to a company with a limited or discretionary interest in the residue of a foreign estate. The section is based on sections 695(5) and 698(3) of ICTA. The corresponding rule for income tax is in section 678 of ITTOIA.
2430.Subsection (2) provides for a reduction to be made from the tax charged on the company following a claim for relief. The tax is to be reduced by an amount equal to the appropriate fraction of that tax. The fraction here (based on section 695(5) of ICTA) is slightly different from the fraction used for absolute interests (based on section 696(7) of ICTA). The labels in section 695(5)(a) and (b) of ICTA – “the deemed income” and “the aggregate income” respectively – were added as explanatory aids in the course of the 1988 consolidation. These labels are not retained.
2431.Section 695(6) of ICTA is not rewritten. The meaning of this provision, which was introduced when surtax was still charged, is now obscure and it is difficult to see how it could operate in the context of Self Assessment for companies. See Change 100 in Annex 1.
2432.This section sets out the rules for determining from which part of the aggregate income of the estate a basic amount is treated as paid. It is based on sections 699A(2) and 701(3A) of ICTA. The corresponding rule for income tax is in section 679 of ITTOIA.
2433.Personal representatives may receive such income from a number of sources, and different rates of tax apply to different types of income. Some of the income is taxed in the hands of the personal representatives at “the applicable rate” (the basic rate or the dividend ordinary rate. See section 963).
2434.The basic amounts of estate income do not always correlate precisely to the income received by the personal representatives. It is therefore necessary to attribute payments out of the residuary estate in the form of basic amounts to particular types of income received by the personal representatives.
2435.This section deals with income which is treated as bearing income tax. It is based on section 699A of ICTA. The corresponding rule for income tax is in section 680 of ITTOIA.
2436.Where such income forms part of the aggregate income of the estate (as a result of section 947(2)), this section treats the income as having borne tax at either the dividend ordinary rate or the basic rate (as appropriate) for certain provisions within the Chapter.
2437.Section 699A(1)(b) of ICTA is not rewritten in this Act. This provision provides that the sums to which section 699A(1)(a) of ICTA applies must be sums in respect of which the personal representatives are not directly assessable to United Kingdom income tax. Of the income referred to in section 699A(1)(a) of ICTA to which section 699A(1)(b) of ICTA applies, none appears to be directly assessable. So section 699A(1)(b) of ICTA serves no useful purpose.
2438.This section is concerned with the appropriation of assets by personal representatives to themselves, any other transfer of assets and the set off or release of a debt. The section is based on section 701(12) of ICTA. The corresponding rule for income tax is in section 681 of ITTOIA.
2439.This section deals with adjustments after the end of the administration period. It is based on section 700(1) to (3) of ICTA. The corresponding rule for income tax is in section 682 of ITTOIA.
2440.This section enables HMRC to obtain information for the purpose of this Chapter. It is based on section 700(4) of ICTA.
2441.This section enables a company to request statements relating to a deceased person’s estate. It is based on section 700(5) and (6) of ICTA.
2442.The last part of section 700(5) of ICTA that requires the statement to set out the matters in section 700(5)(a) to (b) separately for each part of estate income, in cases where different applicable rates apply, has not been rewritten. This requirement is considered unnecessary because the requirement to show amounts separately must occur in order for subsection (1)(b) of this section to be satisfied.
2443.This section provides the meaning of “personal representatives”. It is based on section 701(4) of ICTA.
2444.Section 9 of ICTA applies income tax law and practice to the charge and calculation of corporation tax and has been amended by ITEPA, ITTOIA and ITA in the course of the separation of corporation tax from income tax. (See the commentary on Chapter 1 of Part 2.)
2445.The only context in which the principle underlying section 9 of ICTA continues to be relevant is the charge to corporation tax on income from the holding of an office: this corporation tax charge still operates by reference to income tax.
2446.This section applies “the charge to corporation tax on income” to income from an office. It is based on section 9 of ICTA. The charge on income is explained in section 2.
2447.Section 9(3)(b) of ICTA was amended by ITEPA and refers to employment, pension and social security income. Previously section 9(3) referred to “the like Schedules and Cases”. As a company cannot be an employee and cannot receive pension and social security income, these aspects of section 9(3)(b) have not been rewritten. Employment income however includes income from holding an office. A company can hold an office - a common example is as a company secretary - so this section rewrites that aspect of the source legislation.
2448.Under subsection (2) the amount of income from an office charged to tax is determined in accordance with income tax law and practice and under subsection (4) the provisions of ITEPA govern the calculation of the income from this source. The section uses “calculated” for “computed”.
2449.Subsection (3) provides that subsection (2) is subject to provisions of the Corporation Tax Acts. The Corporation Tax Acts are defined in section 831(1)(a) of ICTA as “enactments relating to the taxation of the income and chargeable gains of companies and of company distributions (including provisions relating also to income tax)”. In section 9(1) of ICTA the reference is to “the Tax Acts”. The reference has been narrowed since the qualifications to subsection (2) of this section only occur in corporation tax enactments.
2450.Section 9(2A) of ICTA which provides that for corporation tax purposes no income shall be computed under ITTOIA is repealed.
2451.Section 9(4) of ICTA expands upon section 9(1). The part of this subsection that applies an exemption in an Income Tax Act (other than ITTOIA and ITA) has been rewritten in subsection (4)(b), since it is not absolutely certain that exemptions are covered by subsections (1) to (3) of this section.
2452.The other part of section 9(4) that provides for any provision of the Income Tax Acts (again other than ITTOIA and ITA) which charges any amount to income tax to have like effect for corporation tax has not been rewritten since the determination of the charge is covered by subsections (1) to (2) of this section (and in the context of employment income in ITEPA free standing charges are not believed to be an issue).
2453.Section 9(5) of ICTA applies “where, by virtue of this section or otherwise” any enactment applies to both corporation tax and income tax. This provision is amended by this Act but is not repealed since it could have an application to an enactment that is not being rewritten.
2454.Section 9(6) of ICTA is repealed since it no longer serves a useful purpose.
2455.The interpretation of “office” in subsection (6) is based on section 5(3) of ITEPA. The ITEPA provision derives from the cases of Great Western Railway Company v Bater (1922), 8 TC 231 and Edwards v Clinch (1981), 56 TC 367. This accords with the application of income tax principles in subsection (2) based on section 9(1) of ICTA.
2456.This section deals with bad debts arising from the holding of an office. It is based on section 88D of ICTA.
2457.The corresponding rule about trade debts is in section 55.
2458.This section is needed because section 88D(4) of ICTA imports the extended meaning of “trade” in section 6(4) of ICTA. So the ICTA rule applies to a vocation and also to an office or employment. In this Act, for corporation tax purposes a company cannot carry on a vocation or be employed.
2459.Subsection (1) excludes from the rule any debts that are dealt with by the loan relationship rules in Parts 5 and 6 of the Act. Section 88D(1) of ICTA also excludes debts that are dealt with by the rules for derivative contracts and intangible fixed assets. Those rules are not relevant to an office-holder and so are not mentioned in the section.
2460.This Chapter applies the charge to corporation tax on income to payments to companies from unauthorised unit trusts. It is based on section 469 of ICTA. The corresponding income tax provisions are in Chapter 10 of Part 4 of ITTOIA.
2461.This section sets out how relevant amounts are calculated and charged to corporation tax. It also points to particular provisions of ITA and of ICTA which deal with the position of a unit holder. It is new.
2462.This section applies the charge to corporation tax on income to amounts shown in the unit trust scheme’s accounts as income available for payment to unit holders or for investment in the scheme. It is based on sections 9, 18 and 469 of ICTA. The corresponding charge for income tax is in section 547 of ITTOIA.
2463.This section sets out the amount of income treated as received by a unit holder from an unauthorised unit trust scheme under section 972(2). It is based on section 469 of ICTA. The corresponding rule for income tax is in section 548 of ITTOIA.
2464.Subsection (2) contains a method statement setting out the steps to be taken to calculate the gross amount of income on which the unit holder is charged to tax.
2465.This Chapter rewrites the charge to tax in section 18(3B) to (3E) of ICTA on the proceeds of the sale of coupons attached to foreign shares, where the sale is made through a bank in the United Kingdom or to a dealer in coupons in the United Kingdom.
2466.Although these provisions include coupons on both securities and shares, for corporation tax purposes the charge applies in effect to the sale of coupons on shares only.
2467.Chapter 2 of Part 4 of FA 1996 charges to tax all profits and gains arising to a company from its loan relationships. Profits and gains include (section 81(5) and 84(1) of that Act) payments payable in pursuance of any rights under a loan relationship. The sale of a coupon on a security is charged to tax in the same way as any sale in pursuance of a right under a loan relationship. Section 18(3B) of ICTA as it applies to coupons on securities is therefore unnecessary for corporation tax purposes and section 80(5) of FA 1996 applies to give the loan relationship provisions precedence in any event.
2468.Section 18(3B) of ICTA requires Schedule D Case IV in section 18(3) to be read as including proceeds of the sales of coupons for foreign dividends. Subsection (3B) does not explain how the charge is allocated between Schedule D Case IV and Case V. The obvious assumption is that where the coupon is issued in respect of a security out of the United Kingdom it falls within Case IV (which charges income from overseas securities) and otherwise within Case V (which charges income from possessions outside the United Kingdom).
2469.Section 18(3A) of ICTA requires “Case III” as set out in that subsection to be substituted for “Case IV” in section 18(3) of ICTA. The effect of this is to bring the extended meaning of Case IV required by section 18(3B) of ICTA into a Case III charge which incorporates a charge under the loan relationships provisions which, as explained above, already charges to tax the sale of coupons in respect of securities.
2470.Whether or not it was intentional that a Case IV charge for corporation tax should remain within section 18(3B) to (3E) of ICTA to be brought within Case III by section 18(3A) of ICTA is unclear. Subsections (3B) to (3E) were introduced in FA 1996, the same Finance Act that introduced section 18(3A) of ICTA. Either way the effect of section 18(3B) to (3E) of ICTA is simply to bring within the loan relationships provisions the sale of coupons on securities even though they are already within the provisions on first principles.
2471.For these reasons section 18(3B) to (3E) of ICTA has been rewritten to exclude the sales of coupons on foreign securities.
2472.This section applies the charge to corporation tax to income which is treated as arising from foreign holdings where a dividend coupon attached to the holding is (a) sold or otherwise realised by a bank in the United Kingdom or (b) sold to a coupon dealer in the United Kingdom by someone other than a bank or a coupon dealer. It is based on section 18(3), (3B) and (3E) of ICTA. The corresponding rule for income tax is in section 570 of ITTOIA.
2473.Subsection (3) applies where the coupon is sold by the bank on behalf of another. See Change 75 in Annex 1.
2474.Subsection (4) applies where a person who is neither a bank nor another coupon dealer sells the dividend coupons to a coupon dealer in the United Kingdom. Section 18(3B)(b) of ICTA refers to a dealer in coupons in the United Kingdom. See Change 75 in Annex 1.
2475.This section gives the meaning of “foreign holdings” and “dividend coupons”. It is based on section 18(3B), (3C), (3D) and (3E) of ICTA. The corresponding rule for income tax is in section 571 of ITTOIA.
2476.For reasons given above the extended definition of “dividends” to include interest or other annual payments has been omitted as part of the exclusion of coupons in respect of securities. It is considered that “dividends” alone in section 18(3D) of ICTA is sufficient to refer to any income from shares.
2477.The definition in subsection (1) of “foreign holdings” as shares outside the United Kingdom which are issued by or on behalf of a non-UK resident body of persons reflects the wording of section 18(3C) of ICTA. Section 18(3B) states that the references in Schedule D Cases IV and V to income arising from securities or possessions out of the UK are to be taken in the case of relevant foreign holdings as including the various categories of proceeds detailed under paragraphs (a) and (b). This is construed as meaning that where the securities or possessions are out of the United Kingdom and are relevant foreign holdings references to income from them include the proceeds under those paragraphs (but not in other cases). In other words there is no assumption of a complete overlap between securities or possessions out of the United Kingdom and relevant foreign holdings. Whether a security or possession is within Cases IV and V as a security or possession out of the United Kingdom may depend on a number of factors (see Westminster Bank Executor and Trustee Co (Channel Islands) Ltd v National Bank of Greece SA (1970), 46 TC 472 HL).
2478.The Chapter sets out the charge to corporation tax on income on any annual payments that are not charged to tax by any other provision of this Act or any other legislation. It is based on the part of section 18 Schedule D Case III (b) of ICTA which deals with annual payments and the part of section 18 Schedule D Case V of ICTA which deals with foreign annual payments. The corresponding rules for income tax are in Chapter 7 of Part 5 of ITTOIA.
2479.Annuity payments made under purchased life annuities and distributions from unauthorised unit trusts (which in the source legislation are treated as annual payments) are generally regarded as investment income. A company which is the recipient of a payment under a purchased life annuity contract is deemed to be a party to a creditor relationship (see sections 561 and 562 of this Act). The application of the charge to corporation tax on income for distributions from unauthorised unit trusts is in section 972 of this Act. As the application of the charge to corporation tax on income for annual payments in this Chapter takes effect only if an amount is not otherwise charged to corporation tax, there is no overlap between the various provisions.
2480.The phrase “annual payment” is retained but is not defined in the Act or in the source legislation. Instead it derives its meaning from an extensive body of case law. That case law illustrates that the phrase has a meaning for tax purposes far different from its natural one. Replacing that phrase would risk breaking the link to case law without making the law any clearer or easier to understand.
2481.This section provides an overview of the Chapter and signposts other relevant provisions. It is new.
2482.This section applies the charge to corporation tax on income to annual payments not charged elsewhere. It is based on sections 9 and 18 of ICTA. The corresponding rule for income tax is in section 683 of ITTOIA.
2483.Subsection (1) applies the charge to corporation tax on income to residual annual payments. The charge to tax in the source legislation is in respect of “any annuity or other annual payment”. The reference to “any annuity or other” is omitted because most annuities are charged to tax not under this Chapter but under Part 5 (loan relationships). Including a reference to annuities might therefore be misleading.
2484.The words “whether inside or outside the United Kingdom” in Schedule D Case III (b) are also omitted. The place of payment is only one of a number of factors derived from case law which may be taken into account in determining the source of annual payments.
2485.The source legislation excludes “any payment chargeable under Schedule A”. It is not necessary to rewrite this as sections 209, 270, 277 and 280 apply the charge to corporation tax on income to property income.
2486.Subsection (2) ensures that any exemption resulting from the application of the charge to corporation tax on income to other income is not reversed by the application of that charge under this Chapter.
2487.Subsection (3) rewrites “or whether annually or at shorter or longer intervals”.
2488.This section gives an exemption from corporation tax for annual payments made by persons liable to pool betting duty. It is based on section 126 of FA 1990 and section 121 of FA 1991. The corresponding rule for income tax is in section 748 of ITTOIA.
2489.The exemption applies to payments made in consequence of a reduction in pool betting duty, whenever that reduction is made (see subsection (2)). Subsection (2) combines the conditions in FA 1990 and FA 1991. Although the source legislation is restricted to the 1990 and 1991 reductions in pool betting duty, the subsection applies to payments made “in consequence of” any reduction in the duty. See Change 36 in Annex 1.
2490.Subsection (3) sets out a further condition which needs to be satisfied. The subsection does not specify that payments in consequence of the 1990 reduction in pool betting duty must be paid for football safety and comfort (see section 126(3) of FA 1990) or that payments in consequence of the 1991 reduction must be paid to the Foundation for Sport and the Arts (see section 121(3) of FA 1991). Instead the subsection applies to a payment in consequence of any reduction in pool betting duty for either purpose. See Change 35 in Annex 1.
2491.This Chapter applies the charge to corporation tax on income to any income that is not so charged by any other corporation tax provision. The corresponding income tax charge is in Chapter 8 of Part 5 of ITTOIA.
2492.The Chapter also includes exemptions from the charge applied under this Chapter.
2493.In the source legislation, Schedule D is the residual Schedule into which income falls for corporation tax purposes if neither ITEPA nor Schedule A applies to it. The Schedule is set out in section 18 of ICTA. Section 18(1)(a) of ICTA charges “annual profits or gains arising or accruing… from any kind of property whatever…”. Section 18(1)(b) of ICTA charges “…other annual profits or gains not charged under Schedule A or under ITEPA 2003 as employment income, pension income or social security income, and not specially exempted from tax”.
2494.Schedule D Case VI is itself the residual Case under that Schedule. Tax is charged under Case VI “in respect of annual profits or gains not falling under any other Case of Schedule D and not charged by virtue of Schedule A or by virtue of ITEPA 2003 as employment income, pension income or social security income”. Schedule D Case V includes an identical function for the income to which that Case applies. The scope of Case V is (subject to the override in section 18(3A) of ICTA giving priority to Schedule D Case III in respect of anything chargeable under Chapter 2 of Part 4 of FA 1996 as profits or gains from loan relationships) “income arising from possessions out of the United Kingdom not being employment income, pension income or social security income on which tax is charged under ITEPA 2003”. Case law has established the comprehensive scope of Case V in relation to “income from possessions out of the United Kingdom”. So far as any amount is “income from possessions out of the United Kingdom”, Case V is the “last resort” charging provision, not Case VI. And a corollary to that rule is that income charged by Case VI (other than deemed income which is directed by provisions other than section 18 of ICTA to be taxed under Case VI) can only derive from a source in the United Kingdom.
2495.This Chapter brings together the “sweep up” functions of Schedule D Cases V and VI.
2496.The charge under this Chapter is restricted to amounts that are “income” on first principles. That is, in terms of the source legislation they are “annual profits or gains” under section 18(1) of ICTA, as that phrase has been interpreted by case law, and do not include profits or gains of a capital nature even if such profits are directed to be charged to tax as income.
2497.Under section 396 of ICTA, Schedule D Case VI losses may be set against Case VI profits or gains. Although that relief is not rewritten in this Act, consequential amendments of ICTA in Schedule 1 to this Act ensure that the relief continues to work as before in respect of income within this Chapter despite the abolition by this Act of the Schedules and the Cases of Schedule D.
2498.This section applies the charge to corporation tax on income to income not so charged elsewhere. It is based on sections 9(1), (2), (2B), (2C), (3) and (4) and 18(1) and (3) of ICTA. The corresponding rule for income tax is in section 687 of ITTOIA.
2499.Schedule D Case V charges tax in respect of income from possessions out of the United Kingdom. Schedule D Case VI charges tax in respect of annual profits or gains. The scope of both Cases is derived from section 18(1) of ICTA, which refers to “annual profits or gains”. Case law does not indicate a difference, in the context of section 18 of ICTA, in the meaning of “annual profits or gains” and “income”. The choice of term appears to be dictated (although not consistently) by the degree to which a calculation of profit or loss is relevant to the calculation of the income charged. The section uses income rather than (annual) profits or gains.
2500.Subsection (2) protects the effect of any exemption, whether provided by this Chapter or by Part 19 (general exemptions) of this Act or by other legislation.
2501.That subsection disapplies the charge to “deemed income”. This term refers to amounts that are treated as income by a provision of the Corporation Tax Acts, so that the charge to corporation tax on income applies to that amount. The disapplication applies in the event that such deemed income would not fall within any other application of the charge to corporation tax on income.
2502.This section exempts income arising from the occupation of commercial woodlands from any charge under this Chapter. It is based on paragraphs 2 and 3 of Schedule 6 to FA 1988. The corresponding rule for income tax is in section 768 of ITTOIA.
2503.A consequence of this exemption is that no loss relief is available under section 396 of ICTA (losses from miscellaneous transactions). A requirement of that section is that any profit on the transaction would be liable to corporation tax.
2504.This section is complemented by sections 37 and 208 of this Act. The combined effect of these three sections is that income from the occupation of commercial woodlands is ignored for corporation tax purposes.
2505.The interpretation of commercial occupation of woodlands in subsection (2) is supplemented by the definition of “woodlands” in section 1317(4) of this Act.
2506.This section removes gains on financial futures, traded options and financial options from the charge to corporation tax on income under this Chapter. It is based on section 128 of ICTA. The corresponding rule for income tax is in section 779 of ITTOIA.
2507.Because of this exemption, the gains in question (which do not include any gains falling within Part 3 (trading income)) are not charged to corporation tax as income but as chargeable gains (see section 143 of TCGA).
2508.In contrast to the equivalent income tax exemption (section 779 of ITTOIA), this exemption does not cover commodity futures. Commodity futures come within the scope of the derivative contracts regime rather than the chargeable gains rules (see Part 7 of this Act). To the extent that any of the futures or options to which this exemption would otherwise apply are also within the scope of that Part, this exemption will not apply. See the definition of a “derivative contract” in section 576.
2509.The section imports the definitions provided by section 143 of TCGA. The definition of “recognised futures exchange” is provided because, unlike the position in ITTOIA (see section 558(3) of that Act), there is no definition of the term elsewhere in this Act that applies here.
2510.This section determines which Part takes priority in the event of an overlap of the charge on the profits of a trade or the profits of a UK property business and a charge under a Chapter of this Part. It is based on section 18(1), (2) and (3) of ICTA. The corresponding rules for income tax are in section 261 of ITTOIA.
2511.In the case of such an overlap, priority is given to the charge under Part 3 (trading income) or Part 4 (property income), as the case may be.
2512.Subsection (1) gives statutory effect to the Crown Option as regards the overlap between income charged under another Case of Schedule D and income of a United Kingdom trade charged under Schedule D Case I. See Change 55 in Annex 1.
2513.Subsection (2) is based on the definition of the Cases of Schedule D in section 18 of ICTA so far as it gives priority to the charge under Schedule A.