ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with current practice. Change 2: Rates of tax: income of personal representative under section 466 of ITTOIA: section 18
This change corrects an anomaly in relation to the rate of tax which applies when personal representatives are liable on gains charged under Chapter 9 of Part 4 of ITTOIA (gains from contracts for life insurance etc).
Chapter 9 provides for a charge where gains arise on certain insurance policies and contracts. The provisions setting out who is liable for tax in respect of the gain include section 465 (individuals) and section 466 (personal representatives) of ITTOIA. For liability under section 465, section 1A(2)(d) of ICTA ensures that a gain counts as savings income and benefits from the charge at the lower rate.
Where the gain arises in circumstances where personal representatives hold the rights in the policy or contract there are two possible outcomes.
The first, if the condition in section 466(2) of ITTOIA is not met, is that section 664(2)(e) of ITTOIA provides that the gain falls into the aggregate income of the estate. (The condition is that the circumstances are such that an individual liable under section 465 on the gain would not be entitled to the tax credit provided by section 530 of ITTOIA.). Section 680(4) of ITTOIA (income treated as bearing income tax) then treats this as income “bearing income tax at the lower rate”.
In this case, the personal representatives are not chargeable under Chapter 6 of Part 5 of ITTOIA (beneficiaries’ income from estates in administration) and, by virtue of section 698A of ICTA (taxation of income of beneficiaries at lower rate or at rates applicable to distribution income), the deemed income of the beneficiary is chargeable at the lower rate rather than the basic rate.
The second possible outcome, if the condition in section 466(2) of ITTOIA is met, is that the personal representatives are chargeable under section 466. The gain still falls into the aggregate income of the estate, but under section 664(2)(a) of ITTOIA rather than section 664(2)(e).
In this case, section 680(4) of ITTOIA does not apply and the normal rules that determine the rate of tax apply instead: the income does not fall within section 1A of ICTA, so the personal representatives are chargeable at the basic rate rather than the lower rate.
It was not intended that the basic rate should apply in these circumstances. The anomaly arose as a result of the amendment to section 1A of ICTA made by paragraph 1 of Schedule 35 to FA 2003. And in practice personal representatives have been given the benefit of the lower rate.
This change removes the anomaly: gains treated under section 466 of ITTOIA as income of personal representatives are included in the definition of savings income (see section 18(4)).