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ANNUITIES: Annuities Tax, Annuities Taxation


Pensions and Annuities Tax Research:

Tax Law Rewrite

Response to the Second Exposure Draft Contents Introduction General issues Plan of Part 6 Chapter 6.1 - Income taxed as savings and investment income Chapter 6.2 - Interest Chapter 6.4 - Annual payments Chapter 6.5 - Royalties etc Chapter 6.6 - Profits from deep gain securities Chapter 6.8 - Exemptions for income within more than one Chapter Part 11 - Exempt income Introduction 1. Our second Exposure Draft, "Savings and Investment Income of Individuals: Part 1" was published on 30 July 1998. We issued over 2,800 copies, over 1,000 of which went to individuals and bodies outside the Inland Revenue, as well as making it available on the Internet where it received nearly 300 "hits". We have received 29 written responses, some of which are extremely detailed. We are very grateful for all these comments. 2. The Exposure Draft invited comments on all the rewritten clauses but also asked specific questions on which we were particularly keen to receive views. Except where our specific questions elicit comments on our general approach, the responses pick up few general themes on rewriting the current legislation about savings and investment income. They mostly address the specific questions or raise points on the clauses themselves. 3. The purpose of this Response Document is to summarise the comments and, as far as possible, to indicate how we are following them up. Time and space don't allow us to deal with every individual comment, especially the numerous minor drafting suggestions, but they have all been recorded and are being carefully considered. Nor is it possible to give a detailed reply to all those who responded to the Exposure Draft, but they are being sent this Response Document instead. 4. The Response Document deals first with some general issues affecting the whole Rewrite before reviewing comments on the specific questions and the clauses. 5. We hope the value of the comments will become apparent in their effect on the eventual legislation. As will be seen later in this Response Document, they are leading us to make changes in the clauses and to undertake further work in several areas. We will also have to take account of changes to the existing legislation made in subsequent Finance Acts. Revised clauses will be published in due course when the proposed Income Tax Bill is published in draft for public consultation. 6. All the rest of the provisions to be included in Part 6, Savings and investment income, will be dealt with in a second (and final) exposure draft. On current plans we expect "Savings and Investment Income of Individuals: Part 2" to be published in October 1999. 7. All statutory references are to the Income and Corporation Taxes Act 1988 (ICTA) unless otherwise stated. General issues 8. The general tenor of responses to our second Exposure Draft is very favourable. As with our first Exposure Draft ("Trading Income of Individuals: Part 1") we are greatly encouraged by the reactions to our work. Overall, respondents find the new clauses much clearer and easier to read than the existing legislation. Both the clauses and the commentary are praised for the standard of drafting. Proposed rewrite changes 9. We are particularly interested in reactions to our proposed deliberate changes in the law. In the Exposure Draft we drew attention to 45 proposed rewrite changes, some of which would involve the enactment of non-statutory material. Ten of the changes would favour the taxpayer and one would favour the Inland Revenue. The other 34 changes would not affect anyone’s liability to income tax. 10. While some respondents would like us to take a bolder approach in making tax law clearer most recognise that we are constrained by our remit from changing the existing impact of the law in all but minor details. Generally our proposed rewrite changes are felt to be desirable. Although we received comments about the way in which we propose to implement the changes (mainly concerned with the drafting), we received very few comments objecting to the changes themselves. Where respondents have raised objections (about the changes in 6.2.6, funding bonds, 6.2.11, certified linked savings arrangements (SAYE schemes), and 6.6.6, meaning of excluded indexed security) we will obviously consider these objections very carefully before deciding whether to retain these proposed rewrite changes. 11. Most respondents are content for proposed rewrite changes to be enacted through the Rewrite process. But a few believe that all changes of this sort warrant Finance Bill legislation. 12. Both our Consultative Committee and our Steering Committee are keen for us to be as bold as possible, within the overall remit of the project, so that we can make the maximum impact on the existing complexities of tax legislation. They agree with our view that minor changes in the law of the sort we have identified and drawn attention to in the Exposure Draft should be made in the rewritten legislation, provided that each proposal has been adequately aired in consultation. Accordingly, everything which might be a change was flagged up in the commentary even if it was not significant enough to be identified as a proposed rewrite change in pages 16 to 20 of the Exposure Draft. 13. The two Committees have also asked us to draw attention to areas of the tax code where respondents agree that it would be desirable to make more fundamental changes to the tax code. The areas identified through this Exposure Draft are: annual payments and charges on income (although responses to the Exposure Draft suggest that any consensus on the way forward might be difficult to achieve); and the tax treatment of non-trading income from intellectual property (this is already being considered as part of a wider reform of the taxation of intellectual property). Inoperative material 14. The inoperative material (such as provisions with overviews and signposts) in our legislation continues to attract strongly-felt but opposing responses. Such material is not intended to have any substantive effect but is there to help readers find their way. Some respondents find this user-friendly and commend us for our signposting. On the other hand, others find it distracting and are concerned that the certainty of new legislation might be undermined by the inclusion of anything that is not strictly necessary. 15. There is no easy way to resolve this issue and we are continuing to experiment. We want to provide navigational aids for users. But, ideally, they need to be clearly separate from the operative provisions and run no risk of affecting the meaning of the operative provisions. In our third Exposure Draft ("Capital Allowances: Part 1"), published in October 1998, we have tried out a new form of overview and the use of notes for signposting. There is an overview of the whole Part and then an overview for each Chapter within the Part. And some of the sections and subsections are followed by notes containing signposts and other aids. This material is distinguished from the actual legislation by being printed in a smaller font size and without indentation. 16. We have asked for comments on this new approach and the responses will be analysed in the Response Document for that Exposure Draft. Formulas 17. Several clauses in our second Exposure Draft included formulas to set out precisely what a computational provision requires to be done. (This is not a new technique - it is already used in the Taxes Acts - but there may be some benefit in using it more extensively.) We asked for views on each of these formulas and the specific responses are covered below. Overall, reactions are mixed. Most respondents are content for us to cover computational matters (such as apportionments) with both narrative text and a formula - although some warn (rightly) against inconsistency between the two. A few respondents, however, would prefer to do without the narrative altogether and rely on just the formula. And a few would generally prefer to rely on just the narrative and consider some of our formulas unnecessary. No one appears to find them a positive hindrance. 18. We will continue to use formulas in computational provisions wherever we think it will make life easier for most users and won't be a barrier for others. Plan of Part 6 19. The Plan of Part 6 merely listed the chapters comprising Part 6, Savings and investment income. The commentary on it however explained in much more detail what Part 6 covered and how we had constructed it. The commentary included six questions. 20. What to include or exclude. We asked for comments on our choice of what should be included (or not included) in Part 6. 21. In general, respondents agree with our choice of what to include in Part 6. But quite a number suggest that the accrued income scheme should also be rewritten here. We are now persuaded that the scheme would be better rewritten as part of the savings and investment income provisions than elsewhere. We will turn to this soon as part of the work on the second (and final) exposure draft on savings and investment income. 22. A few respondents also say we should not include maintenance payments in Part 6, and a couple say we should not include royalties and other income from intellectual property. Both of these types of income are (or can be) annual payments. Later in this Response Document we consider an alternative approach to annual payments, under which all except annuity payments under purchased life annuities would be moved out of Part 6. (See Chapter 6.4, Annual payments, paragraphs 58 to 69, and Chapter 6.5, Royalties etc, paragraph 97.) 23. Respondents agree that it would now not be helpful to rewrite the provisions for TESSAs. 24. Several respondents suggest it would be helpful for the contents of Part 6 to coincide with the ground covered by the question in the self assessment income tax return asking for details of savings and investment income. We agree it would be helpful for the return and the legislation to dovetail. And we had that at least partly in mind when we considered what to include in Part 6. However, while we have taken the current scope of the question in the return into account in making our choice, it must be remembered that the scope is determined by the current legislation. We hope that when we have finished rewriting the rules under which income is charged to tax, so that we have eight (or however many) distinct blocks, the income tax return will be updated to fit in with our scheme for classifying income. 25. Structure of Part 6. We asked for comments on the way we are arranging Part 6. 26. Respondents are content with the way we are arranging the chapters in Part 6 and with the way we are arranging the provisions within the chapters. 27. Exemptions. We asked for comments on the way we are dealing with exemptions. 28. Again, respondents are content. They find our approach of placing exemptions at different levels, according to where the relevant tax charges appear in the rewritten legislation, sensible and logical. Several stress the importance of good signposting, to ensure that someone looking at a charging provision is alerted also to any relevant exemption, and endorse our method of doing this. As indicated above, however, in a more general context several respondents have significant concerns about including "non-operative" material of this kind. 29. Income from investment vehicles. We asked for comments on our approach for dealing with income from investment vehicles. 30. Respondents agree we are right to include in Part 6 only those provisions relating to individual investors, leaving the provisions for the investment vehicles to be rewritten elsewhere. 31. Income from trusts and income from estates. We asked for comments on our approach for dealing with discretionary payments from trusts and income from estates in the course of administration. 32. In general, respondents agree we are right to include only those provisions relating to individual beneficiaries, leaving the provisions for trustees and personal representatives to be rewritten elsewhere, but they are not yet entirely convinced. And several respondents would prefer us not to separate these provisions. We are currently dealing with income from estates in the course of administration as part of our stage 4 work. We will consider the issue further in that context. 33. Deduction of tax. We asked for comments on our proposal that the rules for deduction of income tax are dealt with elsewhere. 34. Respondents agree with our proposal. Chapter 6.1 - What income is taxed as savings and investment income 35. Chapter 6.1 introduces the rules for establishing what income comes within the ambit of Part 6, Savings and investment income. It declares that Part 6 deals with savings and investment income and itemises the main types of income charged to income tax in the chapters that follow. The commentary included three questions. 36. 6.1.2, income from a UK source. The charge to income tax under Schedule D Case III applies "whether such payment is payable within or out of the United Kingdom". The place where interest or annual payments are payable is only one of a number of factors which may be considered in determining the location of a source of income. It is the only one mentioned in the current legislation. And it is a factor to be left out of account. We propose a change in the statute, although not in the underlying law itself, by not rewriting the words "whether such payment is payable within or out of the United Kingdom". We asked for views on whether omitting these words is likely to cause any difficulties. 37. Most respondents are content that these words be omitted. However, a small number think that omitting them could lead to a misunderstanding of what constitutes United Kingdom source income. We remain to be convinced that the absence from the rewritten legislation of this factor, which does not affect the location of a source of income, would have that effect. The clause states clearly that Part 6 taxes only income from sources in the United Kingdom. But we will examine the argument further. 38. More generally, we also asked for views on the extent to which rules for determining the location of a source of income should be included in the legislation and which rules it would be helpful to have set out. 39. A small majority of respondents are in favour of providing rules, but several of those respondents recognise the difficulty in deciding what rules should be included and then drafting them. A sizeable minority are against providing rules. In general those against providing rules consider that the principles concerning source are not suited to legislation as they are not themselves sufficiently clear and unambiguous. Some respondents think it would be helpful to include cross references in note form to, for example, case law or published Inland Revenue guidance. 40. As we said in the commentary, we feel that codifying the principles under which the location of a source of income is determined would probably not be particularly helpful. A number of factors could be relevant to this question of fact and different factors will be more important than others according to the circumstances. At the moment we don't expect to include any general rules, although any special rules in the current legislation will be rewritten and signposted as appropriate. 41. More source rules are becoming relevant as we take account of the other types of income we are dealing with in stages 3 and 4 of our work. As the location of a source of income is a difficult issue it is too soon to take a final view on what would be the most helpful approach for users. We will consider the alternative approaches further, and continue to experiment, as drafting progresses. When we have dealt with all the different types of income which make up the savings and investment block and considered the source rules applicable to each type we will return to the issue. 42. 6.1.4, savings and investment income and other kinds of income. This clause draws the boundaries between the various types of savings and investment income in narrative form. In the commentary, as a possible alternative, we set out the provision in the form of a table. We asked for comments on this alternative approach. 43. Most respondents find the table a clearer and more concise way of expressing the boundaries. Some, however, particularly lawyers, prefer the narrative text. They find the text clear enough and say that the table does not improve clarity. No one appears to find the table more difficult than the text and hence a hindrance. 44. The boundary provisions themselves will change as we take account of the other types of income we are dealing with in stages 3 and 4 of our work. And we will also have to take account of how boundary provisions are framed for the other parts of the Act containing charging provisions; we would not want the approach taken in Part 6 to be inconsistent with the approach used elsewhere. So it is still too soon to take a final view. We will consider the alternative approaches further, and continue to experiment, as drafting progresses. Chapter 6.2 - Interest 45. Chapter 6.2 deals with all income which is interest or is treated as interest. It therefore rewrites the part of Schedule D Case III(a) covering true interest and a number of other provisions which put certain other items of income into Schedule D Case III(a). The commentary included four questions. 46. Exemptions. Current legislation uses a large array of expressions to say that income is exempt from tax. We have tried to introduce some much needed consistency by using only the clearest and most straightforward form of expression - "is exempt from income tax". We asked for comments on our choice of wording for exemptions. 47. Almost all respondents welcome our choice of wording and approve of the improved consistency and greater simplicity. However, several point out that our clauses are not themselves wholly consistent and we have used both "is exempt from income tax" and the abbreviated (and possibly ambiguous) "is exempt from tax". We accept the criticism. We will review all the exemptions and change any we have expressed in abbreviated form. 48. Several respondents also point out the difficulty with saying "is exempt from income tax under this Chapter" and say we need to make it absolutely clear when income may nevertheless be taxable under other provisions. Again the point is well made and we will bear it in mind as we review the exemptions. 49. 6.2.1, charge to tax on interest. After subsection (1) has set out the charge to income tax, subsection (2) sets out the other income which is treated as interest. Then subsection (3) sets out the interest which is exempt from the charge. We asked whether it is helpful to set out the scope of the charge to tax in this way. 50. All respondents who commented on this question agree with our approach. As indicated above, however, we have tried out a new form of overview and notes for signposting in our third Exposure Draft ("Capital Allowances: Part 1"). We will reconsider this clause in the light of responses to this new approach. 51. 6.2.6, funding bonds. Section 582(1) treats the issue of funding bonds as a payment of interest for all purposes of the Taxes Acts, but applies a charge to income tax under Schedule D Case VI in one specific situation. We did not reproduce the Case VI charge, with the result that all funding bonds will be subject to the rules applicable to interest and deductions which might have been available under the Case VI rules will no longer be available. This proposed change in the law is in favour of the Inland Revenue. In practice we believe very few, if any, individual taxpayers will be affected. We asked for comments on the proposed change. 52. There was no consensus on this proposal. Some respondents are in favour of the change. Others felt that it would be wrong in principle to deny the taxpayer a deduction that is available at present - they did not want simplification to be at a cost to the taxpayer. That aside, it appears to be accepted that the change would be a sensible change. 53. We will see if we can discover anything more about the impact of the proposal on individual taxpayers. Subject to that we intend to retain the proposal. It is the only proposed rewrite change in the Exposure Draft in favour of the Inland Revenue and has to be balanced against the ten proposed rewrite changes in favour of taxpayers. 54. 6.2.11, certified linked savings arrangements (SAYE schemes). This clause provides an exemption from income tax for interest payable under certified linked savings arrangements (PAYE schemes). We also included in Part 6 the rules for providers of these arrangements (6.2.12 to 6.2.18) even though they are not relevant to individual investors. We asked for views on whether material of this type should instead be collected together in a separate part of the Act. 55. Respondents would very much prefer these rules for providers to be separated from the rules governing the treatment of investors and moved elsewhere, providing there is adequate signposting. They would like us to follow the same approach for SAYE providers as we are following for investment vehicles such as authorised unit trusts. 56. Although SAYE providers are not quite the same (unlike authorised unit trusts, SAYE schemes are not separate legal entities) we agree that these rules would be better placed elsewhere in a separate part of the Act. We will take them out of Part 6 but we are still considering where they might eventually be placed. Chapter 6.4 - Annual payments 57. Chapter 6.4 deals with income which takes the form of annual payments or is treated as annual payments. It therefore rewrites the part of Schedule D Case III(a) covering annuities and other annual payments and a number of other provisions which put certain other items of income into Schedule D Case III(a) as annual payments. The commentary included seven questions. 58. Annual payments. As the expression "annual payments" causes difficulty we wanted to find some other description of this type of income. It is one of the most complex concepts in the Tax Acts and anyone without tax knowledge would have difficulty identifying an annual payment of the sort covered by Schedule D Case III(a). In the context of provisions dealing with the position of the person receiving (or entitled to) the payment, it is perhaps a little odd to refer to an "annual payment" at all. But, in the light of the extensive case law, we could not see any alternative to retaining both the concept and the term. We asked for views on our approach to annual payments. In particular, we asked for views on any alternative to the concept of "annual payments" or to the term itself. 59. We are not surprised that no respondent has been able to suggest any viable alternative to the concept of annual payments. However, we have received several very thoughtful suggestions for dealing with annual payments in other ways. We are examining these with great interest and hope we can develop a more helpful solution than Chapter 6.4 as it stands. We also received detailed comments on some specific types of annual payments from respondents with special knowledge of the subject area. 60. Respondents acknowledge the difficulty of defining annual payments and so most are content (albeit reluctantly) to retain the term. We received a number of suggestions for making the meaning of the term clearer, including rewriting the examples currently included in section 18; including some new examples; setting out the main criteria for determining whether a payment is an annual payment; codifying the case law; and itemising all annual payments. 61. We had already considered whether it would be possible to set out the criteria in the legislation or otherwise to codify the case law. We had concluded, however, that as there is a great deal of case law, and the meaning of it is often disputed, there was probably no prospect of coming up with any provisions that would satisfy all interested parties. We remain of that view. 62. We are no more optimistic about being able to list all the different types of annual payments. But we could probably list enough to cover the great majority of cases. We are therefore attracted to the idea of providing a non-inclusive list of examples. We will consider this approach further to see whether it can make the meaning of annual payments clearer in most situations. 63. Other respondents wanted to drop the term annual payments and some suggested alternatives, including income that accrues due to the passing of time; periodical receipts; periodical income receipts; yearly income; and annual payments received. 64. We are not convinced that any of these is a sufficient improvement to justify dropping the existing term. In particular, while referring in some form to "receipt" is probably acceptable in general usage and moves one away from the payer, it is still misleading. Under section 59(1) income tax may be charged on "the persons receiving or entitled to the income" and under section 64 it is charged on the income "arising" in the tax year. And what is taxed is the amount of the payment rather than the amount actually received after deduction of tax. 65. In any event, we still need to connect the term to the case law. Changing the term for another term that then needs to be defined by reference to annual payments does not really solve the problem and may even exacerbate it. We think we will probably have to retain the term annual payments. But we accept that it is not very helpful on its own and, as indicated above, we will see what we can do to make its meaning clearer in most situations. 66. As some respondents suggest that most annual payments are not "savings and investment income" - they cite maintenance payments in particular - we could move them out of Part 6 altogether and put them in another part of the Act, perhaps Part 10, Other income. That would make Part 6 more closely focused on true savings and investment income rather than on income which just happens to be taxed in the same way as savings and investment income. 67. Annuity payments under purchased life annuities, however, are generally regarded as investment income. So these are probably better left in Part 6 rather than moved elsewhere. 68. Splitting up annual payments in this way - and others fall within the scope of Part 5, Royalties etc - is a rather fragmentary approach. But they might be easier to deal with out of the mainstream. And, as suggested above, Part 6 would probably be improved by their absence. 69. We are therefore examining the implications of reducing Chapter 6.4 to an appropriate charging provision for annuity payments under purchased life annuities, together with the provisions for the exemption for the capital element, and moving the bulk of the provisions currently in the chapter elsewhere, probably into Part 10, Other income. That won't solve the definition problems but it might improve the arrangement of the legislation and make it easier to use. 70. 6.4.1, charge to tax on annual payments. Following the same approach as 6.2.1, charge to tax on interest, subsection (1) of this clause sets out the charge to income tax, subsection (3) sets out the other income treated as annual payments and then subsection (4) sets out the annual payments which are exempt from the charge (either in whole or in part). Again, we asked whether it is helpful to set out the scope of the charge to tax in this way. 71. Respondents consider it is helpful. Some respondents made suggestions as to how the clause could be made clearer, for example by referring specifically to annuities and by including some examples of annual payments. How we proceed here is largely dependent on the conclusions we draw from our further consideration of the issues covered at paragraphs 58 to 69 above. Also, as indicated previously, we will need to take account of responses to the new form of overview and notes for signposting tried out in our third Exposure Draft ("Capital Allowances: Part 1"). 72. 6.4.5, health and employment risks and benefits. In the context of health risk, the current legislation refers to the insured becoming subject to not only "any physical or mental illness, disability, infirmity or defect" but also to "any deterioration in a condition resulting from any physical or mental illness, disability, infirmity or defect". (Without the reference to the deterioration, no exemption would be available for a health insurance policy taken out by a person who had a pre-existing condition and was insuring against the condition worsening.) 73. Our clause simply refers to "any worsening of any such illness, disability, infirmity or defect" and does not mention the "condition". Our view is that the only "condition" which could be in point here would itself amount to an illness, disability, infirmity, or defect. So the removal of the reference to the "condition" would have no effect. We asked for views on whether our approach may have any adverse consequences. 74. Almost all the respondents who commented agree that it appears that the word "condition" can safely be omitted, although some feel that expert advice (in the medical/medical insurance sector) should be taken. However, one respondent feels that to take out the expression "condition" narrows the ambit of the provision and that the new wording would not cover the worsening of symptoms which attach to a particular illness (rather than a worsening of the illness itself). 75. We are already considering detailed comments on the health and employment insurance clauses from respondents with expert knowledge. We will consider this issue further as part of that work. 76. 6.4.17, extent of exemption under s.6.4.14. The capital element of annuity payments made under purchased life annuities is exempt from income tax. The way in which the exempt part is calculated varies according to the type of annuity involved. There are four different types of purchased life annuity and two basic methods for calculating how much of any annuity payment is exempt. 77. The current legislation is very jumbled and difficult to untangle. And the subject matter itself is, as one respondent describes it, "moderately technical". Our approach was to set out first - how the appropriate method of calculation is determined by whether or not the amount of the annuity payment depends on some contingency other than the duration of a human life (a "non-life contingency"); and second - how the application of each of the methods of calculation may be affected by whether or not the term of the annuity depends on a non-life contingency. 78. By that means we determined the method of calculation, and the way it is to be applied, for each type of purchased life annuity. We asked for comments on the way we dealt with the different types of purchased life annuities. 78. Most respondents are content with our approach. They consider it is simpler and easier to understand than the existing provisions. 80. One respondent, however, would prefer us to describe each type of purchased life annuity separately and set out, for each type, the method of calculation and the way it is to be applied. Another suggests it would be helpful to use a table. 81. We tried both these techniques when we were drafting this set of clauses. Although they had some presentational advantages, they made it more difficult to get the legislation technically accurate without a lot of repetition. On balance, we preferred the approach used in the Exposure Draft because it reveals the concepts underlying the legislation: it sets out more clearly how two particular factors determine the method of calculation and makes a clearer distinction between the two methods. It also made it easier to enact Extra-Statutory Concession A46. 82. Dealing with each type of purchased life annuity separately is a pretty long-winded approach because it means repeating common elements or cross-referring to them where they are used in other rules. In any case, this approach is not necessarily as helpful as it at first appears. In order to identify which rules are relevant to a particular annuity a user has to read about all four types of annuity. And while this eventually leads the user to the right rules it does not help to explain the underlying concepts. 83. This sort of technical subject matter does not work very well in a table. To cover everything here involves including large blocks of text and the formulas in the table. The result is not user-friendly. A table simply to distinguish between the different types of annuity is quite useful for signposting the different rules. If we were listing the different types of annuity we would probably have included such a table. But the user still has to read about all four types of annuity in order to identify which rules are relevant to a particular annuity. 84. 6.4.18, exempt proportion: term not dependent on non-life contingency. We set out the method of calculating the exempt part of the annuity payments covered by this clause both in words and as a formula. We asked whether our dual approach is helpful. 85. Nearly all respondents find the approach of setting out the method of calculation both in words and as a formula helpful. Two respondents, however, prefer just the formula alone. 86. The formula can help people make the actual calculation required by the legislation. But, used on its own, it is not usually an especially good way of explaining the underlying concept of the calculation. Where possible we will continue to use words and formulas together to set out methods of calculation. 87. One respondent also commends our use of letters in the formula which reflect the terms being covered. We will continue to do this wherever practicable. 88. 6.4.19, exempt sum, term not dependent on non-life contingency. We set out the method of calculating the exempt part of annuities covered by this clause as a formula. We asked for comments on the way we have presented the formula. 89. Most respondents like our formula, although a couple suggest slightly different arrangements of the constituent factors. And one respondent warns that the words and formula may not be entirely consistent with each other. We will consider both of these points further. 90. 6.4.27, meaning of grossing up. There is no provision in current legislation equivalent to this clause and it may be that, for many users, such a clause is merely a statement of the obvious. We asked for views on whether the clause serves a useful purpose. 91. Only one respondent wants to leave this clause out. All the others find it helpful. Several suggest another way of expressing the formula: GA = NA x 100 (100 - R) rather than our GA = NA +(NA x __R__100 - R ) 92. And a couple suggest we should add a further statement to say "the amount of the tax is GA x R". 93. We would like to retain this clause. We know that our formula is not the more usual way of dealing with grossing up - the formula respondents suggest is normally used. But we had appreciated that in order to complete an income tax return people who have received a net amount of income need to know not only the gross amount of the income but also the amount of the tax; all three figures have to be entered. Our formula includes the calculation of the tax based only on the known figure of the net amount. It therefore allows the amount of the tax to be calculated, as an integral part of the grossing up calculation, without having first to calculate the gross amount. Consistent with the underlying concept, it calculates the gross amount of the income as the sum of the net amount and the tax. 94. Some respondents also suggest the clause should be signposted from the clauses where grossing up is required. We agree. 95. In stages 3 and 4 we are currently looking at other provisions where grossing up is required. In the context of that work we are considering further where best to place the clause, which formula to use, and what signposts are necessary. Chapter 6.5 - Royalties etc. 96. Chapter 6.5 deals with royalties and other receipts from intellectual property. (In this context, intellectual property includes patents, copyright, know-how, registered designs and design rights, trademarks, franchising, moral rights, rights in performances and plant varieties rights.) It contains a mixed bag of provisions based on some difficult tax legislation and covers receipts which are currently taxed under Schedule D Case III (if they are annual payments) or Case VI (if they are casual profits or within the scope of some specific charging provisions). Receipts which form part of the profits of a trade are dealt with in Part 3, Trading income. 97. Some respondents say we should not include royalties and other income from intellectual property as they are not "savings and investment income". As explained above, we are examining the implications of moving the bulk of the provisions relating to annual payments (currently in Chapter 6.4) out of Part 6 altogether and putting them in another part of the Act, perhaps Part 10, Other income. That would make Part 6 more closely focused on true savings and investment income rather than on income which just happens to be taxed in the same way as savings and investment income. We will consider whether it would also be helpful to move Chapter 6.5 into that other part of the Act. 98. However, it appears that our work in this area is being overtaken by events. On 10 March 1999 the Inland Revenue published a technical note, "Reform of the taxation of intellectual property", inviting people who use or create intellectual property and their advisers to comment on proposals for the introduction next year of new rules on the tax treatment of intellectual property. So, although we will examine the implications of moving Chapter 6.5 out of Part 6, we won't do any detailed work on the clauses for the time being. Our thoughts, below, on how we would like to follow up comments on this part of the Exposure Draft are therefore subject to developments on the reform of this area of the tax code. 99. The commentary on Chapter 6.5 included five questions. 100. Capital Allowances Act 1990. Most of the provisions rewritten in this chapter are affected by section 532, which says that "the Tax Acts shall have effect as if sections 520 to 531, this section and section 533 were contained in" the Capital Allowances Act 1990. In other words, section 532 applies provisions of the Capital Allowances Act to sections 520 to 533. However, it does not specify which parts of that Act are applicable in respect of each of the sections affected, and the extent and manner of their application is sometimes obscure. 101. We propose to wait until the Capital Allowances Act is itself rewritten before deciding how to tackle section 532. We hope then to make the effects of the Capital Allowances Act on Chapter 6.5 much clearer. This might be done by identifying the provisions which are relevant and rewriting them into our clauses. (We included one example of this approach at 6.5.12, which deals with exchanges of property.) Alternatively we could put signposts into our clauses to the relevant sections in the Capital Allowances Act. We asked for views on how the capital allowances provisions should be applied to this chapter. 102. Respondents are evenly divided between those wanting the relevant capital allowances provisions to be rewritten into our clauses and those preferring signposts in our clauses to the relevant sections of the Capital Allowances Act. No one disagrees with our proposal to wait until the Capital Allowances Act is rewritten before deciding which approach to adopt. 103. Schedule D Case III losses. Chapter 6.5 includes profits and gains currently taxed under Schedule D Case VI. The transactions giving rise to such profits may also give rise to Schedule D Case VI losses. Currently, these may be set off against other Schedule D Case VI income under section 392. However, in the rewritten legislation, income currently taxed under Schedule D Case VI is likely to be spread over several parts of the Income Tax Act. There will be no obvious connection between those types of income. Additionally, certain capital allowance provisions under which balancing charges are taxed under Schedule D Case VI will be in a different Act. We don't believe it is sensible to rewrite the present Schedule D Case VI loss provisions to allow such losses to be set off against all the types of income currently taxed under Schedule D Case VI regardless of how they might be taxed under the rewritten legislation. And most respondents accept that the existing set offs will no longer be logical (if, indeed, they are now). We therefore need some new and more appropriate rules. 104. No loss provisions are included in Chapter 6.5 as we have not yet decided how to deal with Schedule D Case VI losses. One option would be to allow relief for Chapter 6.5 losses against income taxable under the chapter. Some taxpayers might be disadvantaged because they would no longer be able to set Schedule D Case VI losses against balancing charges arising on the disposal of certain forms of intellectual property. Other taxpayers, however, would gain through the greater flexibility to set off losses against all income from intellectual property. We asked for views on how Schedule D Case VI losses should be relieved. 105. Again there was no consensus. Quite a number of respondents are in favour of Chapter 6.5 losses being set off only against Chapter 6.5 income. But others want the losses to be available for set off against a wider range of income, possibly against just Part 6 income or (more commonly) against all income. We will consider all this further as work progresses. We have yet to reach most of the Schedule D Case VI provisions so there is obviously a lot more work to be done before any firm conclusions are drawn. 106. 6.5.1, charge to tax on royalties and other income from intellectual property. This clause attempts to encompass anything that constitutes income from intellectual property, but it is no more than a first sketch. Defining intellectual property is particularly difficult. We asked for views on whether all types of intellectual property can be considered to be included in the clause as drafted. 107. By and large, respondents feel that a fuller definition would be more helpful than the one set out in 6.5.1. The majority of respondents give examples of types of property which they consider fall under the heading of intellectual property and have not been specifically referred to in the clause. Some respondents are concerned that the clause does not adequately encompass the new types of intellectual property which have appeared in recent years. And some also consider that the words in 6.5.1(2)(d) - "of a similar kind" - fail to provide sufficient certainty as to what is included in the definition of intellectual property. 108. The responses contain a lot of useful information and suggestions. We will consider all the issues further and continue to work on defining intellectual property so that we can cover all income from such property (other than receipts which form part of the profits of a trade) within the scope of a single charging provision. 109. 6.5.7, UK resident sellers: spreading rules. This clause provides for the charge to income tax on profits from the sale of patent rights (where the seller is resident in the United Kingdom) to be spread over several years. 6.5.7(1) states that the amount chargeable is taxed over six tax years, starting with the year in which the proceeds are received. In line with the current legislation it does not say anything about the situation where the proceeds are received in instalments. Where this occurs in practice, however, each instalment is spread over the six year period which begins with the tax year in which the instalment is received. We asked whether it would be helpful if we set out the rule for instalments in the rewritten legislation. 110. All respondents consider it would be helpful to set out the spreading rule. We will do this. 111. 6.5.13, relief for expenses connected with patents. This clause allows relief to be claimed for certain non-trading expenses incurred in connection with patents. 6.5.13(2) allows the expenses to be set against patent income of the same tax year. If they exceed the patent income of the year, the surplus expenses cannot be used to create a loss. Instead, 6.5.13(3) provides that the excess is carried forward and set off against patent income of the next tax year, and so on until the expenses have been fully relieved. The carry forward to future years is automatic and no additional claim needs to be made. We asked whether it would helpful if this was stated explicitly. 112. Respondents are evenly split on this question. As a number of respondents consider an explicit statement would be helpful we will look at other provisions in which excess expenses (or losses) are carried forward until fully relieved. We can then consider further whether stating explicitly that no additional claim needs to be made would generally be helpful. Chapter 6.6 - Profits from deep gain securities 113. Chapter 6.6 rewrites the bulk of the provisions in Schedule 13 Finance Act 1996 that deal with "Discounted securities: income tax provisions". The commentary included four questions. 114. Clause 6.6.3, meaning of deep gain security. The commentary explained that a deep gain on a security occurs where the amount payable on redemption of the security could exceed the issue price and the potential difference amounts to more than 0.5% of the amount payable on redemption for each year of the security’s life. (For example, a five year bond issued for £90 and redeemable for £100 is a deep gain security because the gain of 10% is more than 2.5% (that is, 0.5% for each year of the bond’s life)). 115. There are many ways in which this test can be expressed algebraically. In the clause we referred to the amount payable on redemption exceeding the issue price by more than a specified percentage of that amount and expressed the specified percentage as a formula: P x 0.5% of that amount 116. In the commentary we suggested two other possibilities: ___P___ 2 x 100 x that amount and P% of that amount 2 117. We asked which formula is most helpful. 118. Respondents are not unanimous, but the majority are content with the formula we used in the clause. 119. Clause 6.6.10, calculating the profit or loss from disposals. In the current legislation there is a two-step method of computing the profit or loss arising from the discount on a relevant discounted security. We replaced this with a one-step method but kept the rules for computing the profit or loss separate, putting them adjacent to each other in the first two subsections of this clause. We asked for comments on our approach. 120. All respondents who commented on this agree with our approach. 121. Clause 6.6.13, application of Chapter 6.6 to strips. In line with the current legislation, we retained a separate set of provisions for gilt strips. We asked for comments on this approach. 122. Again, all respondents who commented on this agree with our approach. 123. Clause 6.6.13, application of Chapter 6.6 to strips. Where a gilt-edged security is "stripped" the acquisition cost of each strip is computed by apportioning the market value of the underlying gilt-edged security between all the strips acquired. In this clause, we first described this apportionment and then expressed it as a formula. We asked whether our dual approach is helpful. 124. Nearly all respondents find the approach of setting out this method of calculation both in words and as a formula helpful. Two, however, prefer just the formula alone and suggest we drop the narrative. 125. As explained above (for 6.4.18), a formula can help people make the actual calculation required by the legislation. But, used on its own, it is not usually an especially good way of explaining the underlying concept of the calculation. Where possible we will continue to use words and formulas together to set out methods of calculation. Chapter 6.8 - Exemptions within more than one Chapter 126. Chapter 6.8 contains exemptions from income tax for income which might otherwise be taxed under provisions in more than one chapter in Part 6, depending on circumstances. Exemptions for income which would otherwise be taxed under provisions in just one chapter of Part 6 are included in the appropriate chapter. Exemptions for income which might be taxed either under provisions in Part 6 or under provisions in another part of the Act, depending on circumstances, are in Part 11. For the time being we have ignored the possibility of exemptions being available for foreign income. 127. The commentary included no questions. Part 11 - Exempt income 128. Part 11 brings together exemptions from income tax for income which might otherwise be taxed either under provisions in Part 6 or under provisions in another part of the Act, depending on circumstances. Exemptions for income which might otherwise be taxed under provisions in just one chapter of Part 6 are included in the appropriate chapter. Exemptions for income which might otherwise be taxed under provisions in more than one chapter of Part 6, depending on circumstances, are in Chapter 6.8. The commentary included one question. 129. 11.1.3, foreign currency securities etc owned by non-UK residents. We asked for comments on our interpretation of section 581(4). 130. All respondents who commented on this agree with our interpretation. ?©Crown Copyright Keywords: Pension, Annuities, Annuity, Pensions, Annuities Tax, Taxation Please note that the annuities and income drawdown information contained within the articles and general text on Annuities Central may not be intended for annuity consumer use, may no longer be current and should not be used by consumers to make financial decisions. It is very important that you don't use this annuity information in isolation to decide which annuity or annuity alternative to buy. Annuity comparisons and pensions information or opinions expressed are made as at the date of this publication and are subject to change without notice. Always seek the help of an annuity broker before you buy an annuity.

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