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 73: Interest relief: omission of section 368(2) of ICTA: section 404
This change omits the requirement under section 368(2) of ICTA that relief for interest under section 353 of ICTA is not to be given against income of a company except where the company is not UK resident and it cannot be taken into account in computing corporation tax.
Section 368(2) of ICTA contains two rules. First, it provides that no relief under section 353 of ICTA is to be given against income chargeable to corporation tax, except where the company is not UK resident and the interest cannot be taken into account in computing corporation tax.
But the only persons now entitled to claim interest relief under section 353 are individuals, except that personal representatives (PRs) may claim for relief under section 364 of ICTA (loan to pay inheritance tax). Companies acting as PRs do so in a fiduciary capacity and profits arising to companies in that capacity are liable to income tax rather than corporation tax by virtue of section 8(2) of ICTA. So if company PRs take out a loan to pay inheritance tax, the interest is a deduction in the income tax computation of the estate, not a deduction for corporation tax purposes.
The second rule in section 368(2) provides that relief under section 353 shall not be given against any other income of a company, (ie income not liable to corporation tax) except where the company is not UK resident and the interest cannot be taken into account in computing corporation tax.
Originally, this enabled a non-resident company receiving rents from property in the United Kingdom to obtain relief for interest on loans to acquire property in the United Kingdom, despite the fact that it could not obtain a deduction from income within Schedule A. It could also have referred to income arising to companies in their capacity as PRs or trustees (and so subject to income tax) or to income beneficially owned by the company but not chargeable to corporation tax for some reason, like distributions from UK resident companies.
As noted above, however, the rule in section 368(2) could now only be relevant in the case of company PRs borrowing to pay inheritance tax. So, the only sort of “other income of a company” that could be in point now is income arising to companies in their capacity as PRs. But there is no reason to prevent relief on such loans being given to UK resident companies, while allowing it to non-UK resident companies. And it is not thought that in practice this relief has been denied to UK resident companies acting as PRs.
Accordingly section 368(2) has not been rewritten.