Annex 1: Minor Changes in the Law Change 70: Miscellaneous income: beneficiaries’ income from estates in administration: exclusion of income from specific dispositions and income from contingent interests from the aggregate income of the estate: sections 947 and 949
This change excludes income from specific dispositions and income from contingent interests from the aggregate income of an estate (which is used to compute the residuary income of an estate and hence affects the amount of estate income that is chargeable to tax where a person has an absolute interest in the estate) and from the deductions made in determining the residuary income of the estate.
It brings the income tax and corporation tax codes back into line.
The aggregate income of the estate is defined in section 701(8) of ICTA as:
	the aggregate income from all sources [for the tax year in question] of the personal representatives of the deceased as such, treated as consisting of – (a)any such income which is chargeable to United Kingdom income tax by deduction or otherwise, such income being computed at the amount on which tax falls to be borne for that year; (b)any such income which would have been so chargeable if it had arisen in the United Kingdom to a person resident and ordinarily resident there, such income being computed at the full amount thereof actually arising during that year, less such deductions as would have been allowable if it had been charged to United Kingdom income tax; (c)any amount of income treated as arising to the personal representatives under section 410(4) of ITTOIA 2005 (stock dividends) that would be charged to income tax under Chapter 5 of Part 4 of that Act if income arising to personal representatives were so charged (see section 413 of that Act); (d)in a case where section 419(2) of that Act applies (release of loans to participator in close company: debts due from personal representatives), the amount that would be charged to income tax under Chapter 6 of Part 4 apart from that section; and (e)any amount that would have been treated as income of the personal representatives as such under section 466 of that Act if the condition in section 466(2) had been met (gains from contracts for life insurance);
	but excluding any income from property devolving on the personal representatives otherwise than as assets for payment of the debts of the deceased.
Property that is the subject of a specific disposition is available for the payment of the deceased’s debts and so is not excluded. However, under section 697(1)(b) of ICTA “the amount of any of the aggregate income of the estate for [a tax year] to which a person has on or after assent become entitled by virtue of a specific disposition either for a vested interest during the administration period or for a vested or contingent interest on the completion of the administration” is deductible from the aggregate income of the estate for that year in calculating the amount of the residuary income of an estate for that year. The Scottish version of this provision omits the words “on or after assent” and the words following “specific disposition”: see section 702(b) of ICTA. But the inclusion of the words “on or after assent” for the rest of the United Kingdom means that much of the income of the specific disposition will form part of the aggregate income. The result is that the measure of the income taken to be available to residuary beneficiaries is inflated.
In practice, HMRC allow all income from specific dispositions to be deducted from the aggregate income of the estate in calculating the residuary income of the estate for 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 to be deducted from it. Accordingly, the definition of “the aggregate income of the estate” in section 947 of this Act contains an exclusion for all income from specific dispositions to which a person is or may become entitled at subsection (5)(a). In consequence, the deduction for this income in section 697(1)(b) of ICTA and its adaptation for Scotland in section 702(b) of ICTA have not been rewritten.
Since income tax is treated as having been paid on this income, any reduction in the income taken to be available to beneficiaries as a result of this change will result in:
	corporate beneficiaries who pay tax at the main corporation tax rate paying less tax; but
	those not liable to corporation tax, or liable to tax at the small companies’ rate, not being able to reclaim so much tax.
This change is adverse to some taxpayers and is favourable to others in principle and in practice. But the numbers affected and the amounts involved are likely to be small.