Annex 1: Minor Changes in the Law Change 73: Miscellaneous income: beneficiaries’ income from estates in administration: how reduction in share of residuary income of estate under section 697(2) and (3) of ICTA operates for successive absolute interests: section 954
This change relates to the reduction in the share of the residuary income of the estate required where the amounts paid during or payable at the end of the administration period in respect of an absolute interest are less than the share of the residuary income for all tax years, and clarifies how the reduction is to be made in cases where the absolute interest has been held successively.
It brings the income tax and corporation tax codes back into line.
Under section 697(2) of ICTA on the completion of the administration of an estate in which a company has an absolute interest, a comparison is made between the aggregate benefits received in respect of that interest and the aggregate for all years of the residuary income of the company having that interest. If the aggregate of the benefits is less than the aggregate of the residuary income, the amount of the shortfall is to be applied in reducing the company’s residuary income for the tax year in which the administration is completed. If that does not exhaust the amount of the shortfall, the remainder is used to reduce the previous tax year’s residuary income, and so on for earlier tax years. (Section 697(2) of ICTA is rewritten in section 951.)
Section 697(4) of ICTA provides that if a different person had an absolute interest in the residue at any time in the administration period “the aggregates mentioned in [section 697(2) of ICTA] shall be computed in relation to those interests taken together”. This is too vague to indicate how the reduction is to be made under section 697(2) of ICTA where there is more than one person with a share of the residuary income of the estate available to be reduced.
One possibility would be for the reduction to be apportioned in some way between the absolute interest holders. But it is not at all obvious how such an apportionment would work because section 697(2) of ICTA requires the excess for the final tax year of the administration period to be used to reduce the last absolute interest holder’s residuary income in the previous tax year. So it is not apparent whether that would have to be done before any other person’s reduction was made. The other holder or holders of the interest may have held it several tax years before the final year.
Section 954(6) and (7) of this Act provide for the reduction to be made in these circumstances. Section 954(6) provides that the last absolute interest holder’s share of the residuary income should be reduced first. If there is still an excess of residuary income over the gross amount of all sums paid during or payable at the end of the administration period after going through all the years in which the final holder had the interest, the excess is then applied to the residuary income of the previous holder for the last tax year in which that person had the interest and then to earlier tax years (and earlier absolute interest holders as appropriate) working backwards.
This change is adverse to some taxpayers and favourable to others in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.