ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL Change 1: Rates of tax: stock dividends and release of loans: section 13
This change ensures that, in line with practice, income chargeable under Chapter 5 or 6 of Part 4 of ITTOIA which would otherwise be taxed at the higher rate is taxed at the dividend upper rate instead.
Section 1B of ICTA, as amended by paragraph 4 of Schedule 1 to ITTOIA, applies the dividend upper rate to an individual’s income within Chapters 3 and 4 of Part 4 of ITTOIA (UK and foreign dividend income) that would otherwise have been taxed at the higher rate. It does not apply the dividend upper rate to income within Chapters 5 and 6 of Part 4 of ITTOIA (stock dividends from UK resident companies and release of loan to participator in close company). But the established practice in both cases has been to treat such income as if it fell within section 1B of ICTA.
This established practice has been recognised in the rewrite of section 1B of ICTA. Section 13(2) applies the dividend upper rate instead of the higher rate to “dividend income”. This term is defined in section 19 to include income under Chapters 5 and 6 of Part 4 of ITTOIA. Accordingly, income within those Chapters will be taxed at the same rates as apply to ordinary dividends.
The amendment to section 1B of ICTA made by ITTOIA did not include references to Chapter 5 or 6 of Part 4 of ITTOIA because it was considered more appropriate to introduce such a change in the course of the rewrite of section 1B itself rather than as an amendment in ITTOIA.