Annex 1: Minor Changes in the Law Change 100: Repeal of section 695(6) of ICTA: Schedule 1
This change relates to the omission of section 695(6) of ICTA, which requires that where relief is given to a company with a limited or discretionary interest in a foreign estate for United Kingdom income tax borne by the income of the estate, the company’s income should include an amount corresponding to the relief.
It brings the income tax and corporation tax codes back into line.
Section 695(5) of ICTA enables a beneficiary of a foreign estate who is entitled to a limited interest in the residue of the estate and is charged to tax for an accounting period in respect of income from the estate to claim relief if any of the aggregate income of the estate has borne United Kingdom income tax for a relevant year of assessment. Section 698(3)(b) of ICTA applies this also to beneficiaries who are charged in respect of income paid from the estate under a discretion.
Section 695(6) of ICTA (which is also applied by section 698(3)(b) of ICTA) provides that where the relief is given “such part of the amount in respect of which [the beneficiary] has been charged to corporation tax as corresponds to the proportion mentioned in [section 695(5) of ICTA] shall be deemed to represent income of such amount as would after deduction of income tax be equal to that part of the amount charged”. (The proportion referred to is the proportion that the amount of the beneficiary’s income that has borne United Kingdom income tax, less the tax, bears to the amount of the aggregate income of the estate, less United Kingdom income tax.) The meaning of this provision, which originated while surtax was still charged, is now obscure, and it is particularly difficult to see how it could operate in the context of Self Assessment for corporation tax. Consequently, in practice it tends to be ignored. Therefore it is not being rewritten in this Act.
This change is beneficial to the taxpayer because the amount of the relief given under section 695(5) of ICTA to a beneficiary does not count as the beneficiary’s income and so the beneficiary’s income is reduced.
This change is in taxpayers’ favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small.