ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL 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 current practice.
Change 102: Accrued income profits: transfers of variable rate securities not treated as transfers with accrued interest: sections 626 and 630
This change alters the way that the accrued income scheme operates as respects transfers of variable rate securities by ceasing to treat them as transfers with accrued interest and applying the special rules relating to them directly.
Where securities are transferred with accrued interest, section 713(2)(a) and (b) of ICTA apply and there is an effect for both the transferor and the transferee. Under section 713(2)(a) of ICTA the transferor is treated as entitled to a sum and under section 713(2)(b) of ICTA the transferee is entitled to relief of the same amount. Section 713(4) and (6) of ICTA apply to determine the amount of the sum or relief (“the accrued amount”) to be taken into account.
Under section 717(7) of ICTA, all transfers of variable rate securities are treated as transfers with accrued interest, even where they would otherwise be transfers without accrued interest. But then section 717(9) of ICTA makes two changes to section 713 of ICTA so that it does not apply in the way it normally does for transfers with accrued interest. First, section 713 of ICTA applies without subsection (2)(b), so that there is an effect only for the transferor and not for the transferee. (This means there can be a charge to tax under the accrued income scheme for the transferor but no corresponding relief for the transferee.) Secondly, section 713(4) to (6) of ICTA do not apply to determine the amount of the “sum” to be taken into account because section 713(3) to (6) of ICTA are replaced with a new subsection (3) that provides:
“In subsection (2) above “the accrued amount” means such amount (if any) as is just and reasonable.”
So this approach applies a fiction, which is actually not very helpful because in fact the rules that are applied are not the same as those that apply to transfers with accrued income. Moreover, removing subsections (3) and (5) of section 713 of ICTA is unnecessary, since they apply only for transfers without accrued income.
Therefore, the fiction in section 717(7) of ICTA has not been rewritten. Instead, transfers of variable rate securities have been removed from the normal accrued income scheme regime, and then the special rules relating to them have been applied directly without first treating them as transfers with accrued interest, and without having to modify the normal rules.
Accordingly, sections 623 and 624, which set out the rules about when transfers are transfers with or without accrued interest, are disapplied for transfers of variable rate securities by section 623(5) and section 624(5). Sections 626 and 630 therefore apply without the intervention of any fiction. And section 635(2) and (3) sets out the special rules for transfers of variable rate securities that are the result of section 717(7) and (9) of ICTA in the terms of the rewritten accrued income scheme in this Part (i.e. that the transferee is not treated as making a payment on the transfer and the amount of the payment treated as made is such amount as is just and reasonable).