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Income Tax (Trading and Other Income) Act 2005

Type Public General Act

Publication 2005-03-24

Last updated 2026-01-20

State In force

Department Statute Law Database

Source legislation.gov.uk

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(5) No calculations are required to be made under section 510(2) and (4) in relation to any subsequent relevant transaction in respect of the policy or contract.

514

(1) If the calculation in section 511 shows that a relevant transaction resulted in a gain arising on the policy or contract, the relevant transaction is treated as a chargeable event.

(2) Subsection (1) is subject to section 485(5) (which restricts the circumstances in which such events occur in relation to qualifying policies).

(3) Subsection (4) applies if—

(a) a relevant transaction that is a chargeable event occurs in a different tax year from that in which the insurance year ends, and

(b) apart from subsection (4), a person would be liable to tax on the gain under this Chapter for the tax year in which the transaction occurs.

(4) The gain is charged to tax under this Chapter for the tax year in which the insurance year ends instead.

(4A) Subsection (3)(b) includes a case where a person would be liable to tax on the gain under section 465B for the tax year in which the transaction occurs (because the transaction occurs in the year of return, as defined in that section).

(5) If the relevant transaction occurs in the final insurance year, the chargeable event within subsection (1) is treated as occurring before the chargeable event that ends that year.

Personal portfolio bonds

Requirement for annual calculations in relation to personal portfolio bonds 9

515

(1) This section applies if a policy or contract to which this Chapter applies is a personal portfolio bond at the end of an insurance year.

(2) But this section does not apply if the insurance year is the final insurance year.

(3) A calculation is to be made in accordance with section 522 in relation to the policy or contract as at the end of the insurance year to determine—

(a) whether a gain has arisen on the policy or contract in relation to that year, and

(b) if so, the amount of the gain.

(4) The calculation is in addition to any other calculation which is required to be made under this Chapter in relation to the policy or contract.

Meaning of “personal portfolio bond”

516

(1) In this Chapter “personal portfolio bond” means a policy of life insurance, contract for a life annuity or capital redemption policy which meets conditions A and B.

This is subject to section 517.

(2) Condition A is that, under the terms of the policy or contract, some or all of the benefits are determined by reference to—

(a) fluctuations in, or in an index of, the value of property of any description, or

(b) the value of, or the income from, property of any description.

(3) For this purpose it does not matter whether or not the index or property is specified in the policy or contract.

(4) Condition B is that the terms of the policy or contract permit the selection of the index or some or all of the property by—

(a) the holder of the policy or contract,

(b) a person connected with the holder,

(d) a person acting on behalf of the holder,

(e) a person acting on behalf of a person connected with the holder, or

(f) a person acting on behalf of the holder and such a connected person acting together.

(5) In subsection (4) “holder”, in the case of a policy or contract held by two or more persons, means any of them.

Policies and contracts which are not personal portfolio bonds

517

(1) A policy or contract is not a personal portfolio bond merely because its terms permit the selection of an index as described in section 516(4) if that index—

(a) falls within one of the categories listed in section 518, and

(b) meets one of the index selection conditions (see section 519).

(2) A policy or contract is not a personal portfolio bond merely because its terms permit the selection of property as described in section 516(4) if all of the property which may be so selected—

(a) falls within one or more of the categories listed in section 520, and

(b) meets one or both of the property selection conditions (see section 521).

The index categories

518

(1) This section sets out the categories of index referred to in section 517(1).

(2) Category 1 is the retail prices index.

(3) Category 2 is any general index which—

(a) is similar to the retail prices index, and

(b) is published by the government of any foreign state or an agent of such a government.

(4) Category 3 is any published index of prices of shares listed on a recognised stock exchange.

The index selection conditions

519

(1) The index selection conditions are—

(a) the general selection condition (see subsection (2)), and

(b) the class selection condition (see subsection (3)).

(2) An index meets the general selection condition if, at the time when it may be selected, the opportunity to select the same index is available to—

(a) all policy holders of the insurance company, or

(b) persons acting on behalf of those policy holders.

(3) An index meets the class selection condition if, at the time when it may be selected, the opportunity to select the same index is available to—

(a) a particular class or classes of policy holders of the insurance company, or

(b) persons acting on behalf of the members of that class or those classes.

(4) A group of policy holders to whom the opportunity to select an index is available is a “class” for the purposes of subsection (3) if—

(a) neither membership of the class nor the opportunity are limited to connected persons,

(b) the question whether a policy holder is a member of the class, or has the opportunity, is determined solely by the insurance company, and

(c) the opportunity is clearly identified in marketing or other promotional material published by the insurance company to members of the public, or members of the public who are intending investors, as available generally to any person falling within its terms.

(5) In this section—

“holder” has the meaning given by section 516(5), and

“policy holder” includes a holder of a life annuity contract.

The property categories

520

(1) The table in subsection (2) sets out the categories of property referred to in section 517(2).

(2) This is the table—

Category	Property
Category 1	property which the insurance company has appropriated to an internal linked fund
Category 2	units in an authorised unit trust
Category 3	shares in an investment trust or an overseas equivalent
Category 4	shares in an open-ended investment company
Category 5	cash
Category 6	a policy or contract to which this Chapter applies, other than an excluded policy or contract (see subsection (3))
Category 7	an interest in a collective investment scheme constituted by—... a unit trust scheme the trustees of which are non-UK resident, or any other arrangement which takes effect by virtue of the law of a territory outside the United Kingdom, and which under that law creates rights in the nature of co-ownership (without restricting that term to its legal meaning in any part of the United Kingdom)
Category 8	shares in a UK REIT or an overseas equivalent
Category 9	an interest in an authorised contractual scheme or a Reserved Investor Fund (Contractual Scheme)

(3) A policy or contract is “excluded” if—

(a) the policy or contract is itself a personal portfolio bond,

(b) the value of any benefits under the policy or contract is or has at any time been capable of being determined directly or indirectly by reference to a personal portfolio bond, or

(4) In this section—

“authorised contractual scheme” means a contractual scheme (within the meaning given by section 235A(1) of FISMA 2000) which is authorised for the purposes of FISMA 2000 by an authorisation order in force under section 261D(1) of that Act,

“cash”—includes any sum which is deposited—in a building society account (including a share account) or similar account, orin a bank account or similar account, butdoes not include cash which is acquired wholly or partly for the purpose of realising a gain from its disposal,

“collective investment scheme” has the meaning given by section 235 of FISMA 2000, and “interest”, in relation to such a scheme, means the beneficial entitlement of a participant in such a scheme,

“internal linked fund” has the meaning given by—the Interim Prudential Sourcebook for Insurers made by the Prudential Regulation Authority under FISMA 2000, orrules made by the “Prudential Regulation Authority under FISMA 2000 and having effect for the time being in place of the Sourcebook,

“investment trust” has the meaning given by section 1158 of CTA 2010,

“open-ended investment company” has the meaning given by section 236 of FISMA 2000, and

overseas equivalent”, in relation to an investment trust or a UK REIT, means a company— which is resident in a territory outside the United Kingdom in accordance with the law of that territory relating to taxation, andwhich is, under the law of that territory, the equivalent of an investment trust or a UK REIT (respectively),

“related property” has the same meaning as in section 625 (see subsection (5)),

“Reserved Investor Fund (Contractual Scheme)” has the meaning given by section 20 of F(No.2)A 2024,

“UK REIT” has the same meaning as in Part 12 of CTA 2010 (see section 518(4)).

(5) The Treasury may by regulations—

(a) amend the table in subsection (2) by adding, removing or amending a category of property;

(b) add, remove or amend a definition relating to any category of property in that table; and

(6) A statutory instrument containing regulations under this section which have the effect of removing a category of property from the table in subsection (2)—

(a) must be laid before the House of Commons; and

(b) ceases to have effect at the end of the period of 28 days beginning with the day on which it was made, unless it is approved during that period by a resolution of the House of Commons.

(7) In reckoning the period of 28 days, no account is to be taken of any time during which Parliament is dissolved or prorogued, or during which the House of Commons is adjourned for more than four days.

The property selection conditions

521

(1) The property selection conditions are—

(a) the general selection condition (see subsection (2)), and

(b) the class selection condition (see subsection (3)).

(2) Property meets the general selection condition if, at the time when it may be selected, the opportunity to select property falling within the same category is available to—

(a) all policy holders of the insurance company, or

(b) persons acting on behalf of those policy holders.

(3) Property meets the class selection condition if, at the time when it may be selected, the opportunity to select property falling within the same category is available to—

(a) a particular class or classes of policy holders of the insurance company, or

(b) persons acting on behalf of the members of that class or those classes.

(4) A group of policy holders to whom the opportunity to select property falling within a particular category is available is a “class” for the purposes of subsection (3) if—

(a) neither membership of the class nor the opportunity are limited to connected persons,

(b) the question whether a policy holder is a member of a class, or has the opportunity, is determined solely by the insurance company, and

(c) the opportunity is clearly identified in marketing or other promotional material published by the insurance company to members of the public, or members of the public who are intending investors, as available generally to any person falling within its terms.

(5) In this section—

“holder” has the meaning given by section 516(5), and

“policy holder” includes a holder of a life annuity contract.

Method for making annual calculations under section 515

522

(1) This section deals with the calculation required to be made in relation to a policy or contract as at the end of an insurance year under section 515 to determine—

(a) whether a gain has arisen in relation to that year, and

(b) if so, the amount of the gain.

(2) There is a gain if, as at the end of the insurance year, the sum of PP and TPE exceeds TSG.

(3) In subsection (2)—

PP is the total amount of premiums paid up to the end of the insurance year,

TPE is the total amount of personal portfolio bond excesses (see section 523), and

TSG is the total amount of part surrender gains (see section 524).

(4) The gain is equal to 15% of the excess.

The total amount of personal portfolio bond excesses

523

(1) To calculate the total amount of personal portfolio bond excesses—

Step 1

Apply the calculation in section 522 in relation to the policy or contract as at the end of each previous insurance year during its existence in succession starting with the first such year.

Step 2

Determine whether in each case the calculation produces a gain and, if so, its amount.

Step 3

Add together all the amounts produced by step 2.

(2) But if there is no previous insurance year during the existence of the policy or contract, the total amount of personal portfolio bond excesses is nil.

The total amount of part surrender gains

524

(1) To calculate the total amount of part surrender gains—

Step 1

Apply the provisions of this Chapter mentioned in subsection (3) as modified by subsections (4) and (5) in relation to the policy or contract as at the end of each previous insurance year during its existence.

Step 2

Determine whether in each case those provisions produce a gain and, if so, its amount.

Step 3

Add together all of the amounts produced by step 2.

(2) But if there is no previous insurance year during the existence of the policy or contract, the total amount of part surrender gains is nil.

(3) The provisions of this Chapter which apply for the purposes of the calculation in subsection (1) are—

(a) subsections (2) to (6) of section 507 (method for making periodic calculations), and

(b) subsections (1) to (3) and (5) of section 508 (the value of rights partially surrendered).

(4) The provisions of section 507 mentioned in subsection (3) apply for the purposes of this section with the omission of all references in that section—

(a) to the assignment of any part of or share in the rights under the policy or contract, or

(b) to the value of any part of or share in the rights under the policy or contract so assigned.

(5) In the application of step 3 in subsection (4) of section 507 for the purposes of this section, the reference in that step to previous calculation events does not include a reference to an excess event consisting of the assignment of a part of or share in the rights under the policy or contract.

Chargeable events where annual calculations show gains

525

(1) This section applies if the calculation in section 522 shows that a gain has arisen in relation to an insurance year.

(2) The gain is treated as arising at the end of the insurance year on the occurrence of a chargeable event at that time.

Power to make regulations about personal portfolio bonds

526

(1) The Treasury may by regulations make provision about the administration of the charge to tax on personal portfolio bonds.

(2) The regulations may modify—

(a) any provision of this Chapter, or

(b) any provision of Chapter 2 of Part 13 of ICTA.

(3) The regulations may—

(a) make different provision for different cases, different circumstances or different periods, and

(b) make incidental, supplemental, consequential or transitional provision or savings.

(4) In this section “modify” includes amend or repeal.

Reductions from gains

Reduction for sums taken into account otherwise than under Chapter 9

527

(1) This section applies if the whole or part of any receipt or other credit item is taken into account in calculating both—

(a) the amount of a gain treated as arising under this Chapter, and

(b) an amount on which income tax is charged otherwise than under this Chapter or on which corporation tax is charged.

(2) The amount of the gain on which tax is charged under this Chapter is reduced by so much of the amount of that receipt or other credit item as is taken into account in both those calculations.

Reduction in amount charged: non-UK resident policy holders

528

(1) Subsection (2) applies if—

(a) an individual is liable for tax charged on a gain from a policy of life insurance or a capital redemption policy, and

(b) there are one or more days in the material interest period that are foreign days.

(1A) Foreign days” are—

(a) days falling within any tax year for which the individual is not UK resident, and

(b) days falling within the overseas part of any tax year that is a split year as respects the individual.

(2) In determining the individual's liability for tax, the gain on which the tax is charged in the case of the individual is to be reduced by the appropriate fraction.

(3) The appropriate fraction is—

$$A B$where—A is the number of days in the material interest period which are foreign days, andB is the number of days in the material interest period.$

(4) In subsection (2) the reference to the gain is to be read in accordance with section 463A(4), 463D(4) or 463E(3) (which relates to restricted relief qualifying policies etc) if applicable.

(5) In this section “the material interest period” means so much of the policy period as during which the individual meets condition A, B or C in section 465 in relation to the policy (subject to subsection (7)).

(6) Subsections (7) and (8) apply if, before the chargeable event, there is an assignment falling within section 487(c) in relation to the policy where the individual is the assignee.

(7) There is to be added to the material interest period any part of the policy period falling before the assignment—

(a) during which the assignor meets condition A, B or C in section 465 in relation to the policy, and

(b) which is not included in the material interest period under subsection (5).

(8) In relation to any period added to the material interest period under subsection (7), in subsection (1A)(a) and (b) the reference to the individual is to be read as a reference to the assignor.

(9) For the purposes of subsections (5) and (7), in section 465(2) to (4) references to the rights under the policy are to be read as including references to a share of those rights.

(10) In this section “the policy period” means the period for which the policy has run before the chargeable event occurs.

(11) If the policy is a policy of life insurance which is a new policy in relation to another policy, for the purposes of subsection (10) the new policy is to be taken to have run—

(a) from the issue of the other policy, or

(b) if it also was a new policy in relation to an earlier policy, from the issue of the earlier policy,

and so on; and in subsections (5) to (9) references to the policy are to be read accordingly as including any relevant earlier policy.

(12) In subsection (11) “new policy” has the meaning given in paragraph 17 of Schedule 15 to ICTA.

Exceptions to section 528

529

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income tax treated as paid and reliefs

Income tax treated as paid etc.

530

(1) An individual or trustees who are liable for tax on an amount under this Chapter are treated as having paid income tax at the basic rate on that amount.

(2) The income tax treated as paid under subsection (1) is not repayable.

(3) The amount on which an individual is treated under subsection (1) as having paid income tax is reduced if subsection (4) applies.

(4) This subsection applies if the individual's total income is reduced by any deductions which fall to be made at Step 2 or 3 of the calculation in section 23 of ITA 2007 (calculation of income tax liability) from the part of the income charged to tax under this Chapter.

(5) The reduction under subsection (3) is equal to the amount of those deductions.

(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(7) This section is subject to section 531.

Exceptions to section 530

531

(1) Section 530 does not apply to gains from the kinds of policies and contracts specified in subsection (3), except for the purposes of calculating relief under section 535 (top slicing relief).

(2) Subsection (1) is subject to—

section 532 (relief for policies and contracts with European Economic Area insurers), and

section 534 (regulations providing for relief in other cases where foreign tax chargeable).

(3) The policies and contracts are—

(a) a policy of life insurance issued or a contract for a life annuity made by a friendly society in the course of exempt BLAGAB or eligible PHI business ,

(b) a foreign policy of life insurance that does not meet conditions A and B,

(c) a contract for a life annuity (other than one within paragraph (a)) which has at any time not formed part of any insurance company's or friendly society's basic life assurance and general annuity business the income and gains of which are subject to corporation tax, and

(d) a foreign capital redemption policy.

(4) In this section and section 532—

“basic life assurance and general annuity business” has the same meaning as in Part 2 of FA 2012 (see sections 57 and 67(5)) , and

“exempt BLAGAB or eligible PHI business” has the same meaning as in Part 3 of FA 2012 (see sections 154 and 155).

(5) Condition A is that the policy falls within paragraph (a) of the definition of “foreign policy of life insurance” in section 476(3) (policy issued by a non-UK resident company).

(6) Condition B is that the conditions in paragraph 24(3) of Schedule 15 to ICTA (conditions that are required to be met for certain policies issued by non-UK resident companies to be qualifying policies) are met throughout the period between—

(a) the date on which the policy was issued, and

(b) the date on which the gain arises.

Relief for policies and contracts with European Economic Area insurers

532

(1) Section 530 applies to a gain from a foreign policy of life insurance or a foreign capital redemption policy or to a gain from a contract for a life annuity (and accordingly section 531 and paragraph 109(2) of Schedule 2 do not apply) if a claim is made that conditions A to C have been met throughout the policy period.

(2) Condition A is that the company liable to make payments under the policy or contract (“the insurer”) has not been UK resident.

(3) Condition B is that a comparable EEA tax charge has applied to the insurer (see section 533).

(4) Condition C is that no excluded reinsurance contract has been made in relation to the policy or contract.

(5) In this section—

“excluded reinsurance contract”, in relation to a policy or contract, means any reinsurance contract—wholly or partly covering any of the insurer's obligations to pay any sum or to meet any other liability arising under the policy or contract, andrelating to risk other than that the individual whose life is insured by the policy or the annuitant will die or suffer any sickness or accident,

“policy period”—in relation to a policy, means the period between—the making of the insurance or contract, andthe date on which the gain arises,but excluding any period when the conditions in paragraph 24(3) of Schedule 15 to ICTA are met (conditions that are required to be met for certain policies issued by non-UK resident companies to be qualifying policies), andin relation to a contract for a life annuity, means the period between—the date the insurer entered into the contract, andthe date on which the gain arises,but excluding any period when the contract fell to be regarded as forming part of a basic life assurance and general annuity business the income and gains of which were subject to corporation tax.

Meaning of “comparable EEA tax charge”

533

(1) In section 532 “comparable EEA tax charge” in relation to the company liable to make payments under the policy or contract under which the gain has arisen (“the insurer”) means a charge that meets conditions A to F.

(2) Condition A is that the charge is imposed on the insurer under the laws of a territory outside the United Kingdom that is within the European Economic Area when the gain arises.

(3) Condition B is that the charge has applied to the insurer—

(a) as a body deriving its status as a company from those laws,

(b) as a company with its place of management there, or

(4) Condition C is that the charge applies at a rate of at least 20% in relation to the amounts subject to tax in the insurer's hands, other than amounts arising or accruing in respect of investments of a description for which a special relief or exemption is generally available.

(5) Condition D is that the charge is made otherwise than by reference to the insurer's profits.

(6) Condition E is that the charge requires sums payable and other liabilities arising under policies or contracts of the same class as the policy or contract in question to be treated as falling to be met out of amounts subject to tax in the insurer's hands.

(7) Condition F is that the charge so requires them by disallowing their deduction in calculating the amount chargeable.

Regulations providing for relief in other cases where foreign tax chargeable

534

(1) This section applies if—

(a) apart from this section, as a result of section 531 or paragraph 109(2) of Schedule 2, section 530 would not apply to gains from a policy or contract (except for the purposes of section 535 (top slicing relief)), and

(b) the Board of Inland Revenue consider it appropriate to disapply section 531 and paragraph 109(2) of Schedule 2 in relation to such gains by reference to tax chargeable under the laws of a territory outside the United Kingdom in cases other than those where they are disapplied as a result of section 532.

(2) The Board of Inland Revenue may by regulations provide for section 530 to apply to those gains (and accordingly section 531 and paragraph 109(2) of Schedule 2 not to apply to them) if a claim is made that the conditions specified in the regulations are met in relation to any time.

(3) That time may be a time before the regulations are made or a later time.

Top slicing relief

535

(1) An individual is entitled to relief under this section for a tax year if—

(a) the individual's liability for the tax year, as calculated under subsection (3), exceeds

(b) the individual's relieved liability for the tax year, as calculated under—

section 536 (top slicing relieved liability: one chargeable event), or

section 537 (top slicing relieved liability: two or more chargeable events).

(2) The relief is given by a reduction in or repayment of income tax equal to the excess.

(2A) If the relief is given by a reduction in income tax, it is given effect at Step 6 of the calculation in section 23 of ITA 2007.

(3) An individual's liability for a tax year for the purposes of subsection (1)(a) equals TL — BRL , where—

TL is the amount of the individual's total liability to income tax on income charged to tax under this Chapter for the tax year, calculated on the basis that no relief is available under this section and the highest part assumptions apply, and

BRL is the amount of income tax at the basic rate that the individual is treated as having paid under section 530(1) for the tax year.

(4) For the purposes of subsection (3) and sections 536 and 537, the highest part assumptions, in calculating liability to income tax on an amount, are that—

(a) the amount is the highest part of the individual's total income for the tax year, and

(b) any provision directing any other amount to be treated as the highest part is ignored.

(5) For the purposes of this section and sections 536 and 537, an individual's total income is treated as not including any amount which—

(a) is charged to tax under Chapter 4 of Part 3 (profits of property businesses: lease premiums etc.) as the profits of a UK property business, or

(b) counts as employment income under section 403 of ITEPA 2003 (payments and benefits on termination of employment etc.).

(6) For the purposes of this section and sections 536 and 537—

(a) any chargeable event under section 525(2) (chargeable events where annual personal portfolio bond calculations show gains),

(b) any gain treated as arising on the occurrence of such an event, and

are ignored.

(7) For the purposes of the calculations mentioned in subsection (1) any relief under Chapter 2 or 3 of Part 8 of ITA 2007 (which relate to gift aid and other gifts to charities) is ignored.

(8) For the purposes of the calculations mentioned in subsection (1)—

(a) section 25(2) of ITA 2007 (deductions of reliefs and allowances in most beneficial way for taxpayer) does not apply, and

(b) reliefs and allowances are available for deduction from an amount that, for the purposes of those calculations, is the highest part of the individual’s total income for the tax year only so far as they cannot be deducted from other amounts.

Top slicing relieved liability: one chargeable event

536

(1) To calculate an individual's relieved liability for the purposes of section 535(1) for a tax year for which the individual is only liable for tax on a gain from one chargeable event—

Step 1

Find the annual equivalent of the amount of that gain (“the annual equivalent”) by dividing that amount by the number of complete years for which the policy or contract has run before the chargeable event (“N”).

See subsections (2) to (8) for further provisions about calculating N.

Step 2

Find the relieved liability on the annual equivalent by—

(a) calculating the individual's liability (if any) to income tax on the annual equivalent, on the basis that—

(i) the gain from the chargeable event is limited to the amount of the annual equivalent, ...

(ii) the highest part assumptions apply, and

(iii) in determining the amount of the individual’s personal allowance under section 35 of ITA 2007 (but not the amount of any other relief or allowance), it is assumed that the gain from the chargeable event is equal to the amount of the annual equivalent, and

(b) subtracting the amount of income tax at the basic rate on the annual equivalent which the individual is treated as having paid under section 530(1).

Step 3

Multiply the relieved liability on the annual equivalent by N.

(2) In the case of a calculation event that is not the first calculation event in relation to the policy or contract, for steps 1 and 3 in subsection (1) N is the number of complete years since the previous such event (but see subsection (6)).

(3) For the purposes of subsection (2), part surrender or assignment events are taken to occur at the end of the insurance year in which the surrender or assignment occurs.

(4) If, in a case where subsection (2) does not apply, the gain is from a policy of life insurance which is a new policy in relation to another policy, for steps 1 and 3 N is calculated from—

(a) the issue of the other policy, or

(b) if it also was a new policy in relation to an earlier policy, the issue of the earlier policy,

and so on.

(5) In subsection (4) “new policy” has the meaning given in paragraph 17 of Schedule 15 to ICTA.

(6) Subsection (2) does not apply if the gain is reduced under section 528 in the case of the individual.

(7) If in the case of the individual the gain is reduced under section 528—

(a) divide the number of foreign days in the material interest period (as determined in accordance with that section, including subsections (7) and (8)) by 365,

(b) if the result is not a whole number, round it down to the nearest whole number, and

(8) If subsections (4) and (7) both apply, subsection (7) applies to N as calculated under subsection (4).

Top slicing relieved liability: two or more chargeable events

537

To calculate an individual's relieved liability for the purposes of section 535(1) for a tax year for which the individual is liable for tax on gains from two or more chargeable events—Step 1Calculate the total annual equivalent by adding together the annual equivalents for each of the chargeable events, found as specified in step 1 in section 536(1).Step 2Find the total relieved liability on the total annual equivalent by— calculating the individual's liability to income tax (if any) on the total annual equivalent, on the basis that— (i) the total gains from the chargeable events are limited to the amount of the total annual equivalent, ... (ii) the highest part assumptions apply, and (iii) in determining the amount of the individual’s personal allowance under section 35 of ITA 2007 (but not the amount of any other relief or allowance), it is assumed that the total gains from the chargeable events are equal to the amount of the total annual equivalent, and subtracting the amount of income tax at the basic rate on the total annual equivalent which the individual is treated as having paid under section 530(1).Step 3Multiply the total relieved liability on the total annual equivalent by the total gains charged to tax under this Chapter for the tax year in respect of all the events.Step 4Divide the result of step 3 by the total annual equivalent.

Recovery of tax from trustees

538

(1) This section applies if—

(a) immediately before a chargeable event the rights under the policy or contract, or the part of or share in them in question, were held on non-charitable trusts,

(b) an individual is liable for tax under this Chapter for the tax year on the gain from the event, and

(c) the income tax for which the individual is liable for the tax year, after any relief available in respect of the gain under section 535 (top slicing relief), exceeds that for which the individual would have been liable apart from the event.

(2) The individual is entitled to recover that excess from the trustees, subject to the restriction specified in subsection (3).

(3) The amount recovered must not exceed the total of—

(a) any sums received by the trustees because of the chargeable event, and

(b) the value of any benefits so received.

(4) If the individual's relief under section 535 for the tax year does not relate only to the gain from the event in question, for the purposes of subsection (1)(c) a proportionate part of that relief is taken to be relief in respect of that gain.

(5) An individual may require the Inland Revenue to certify an amount recoverable by the individual under this section.

(6) Such a certificate is conclusive evidence of the amount.

(7) Subsection (8) applies where—

(a) an individual has recovered an amount from trustees under this section, and

(b) subsequently the individual's liability to tax under this Chapter has been reduced (or removed) as a result of a recalculation under section 507A or 512A.

(8) The individual must repay to the trustees the amount (if any) by which the recovered amount exceeds the individual's revised entitlement.

(9) In subsection (8) the individual's revised entitlement is the amount to which the individual is entitled under this section calculated by reference to the individual's liability to tax under this Chapter as reduced (or removed) as a result of the recalculation under section 507A or 512A.

Deficiencies

Relief for deficiencies

539

(1) An individual is entitled to a tax reduction for a tax year in which a deficiency arises from a policy or contract on a chargeable event if—

(a) the condition in subsection (2) is met,

(b) the individual would (apart from this section) be liable to income tax at one or more relevant rates for the tax year, and

(2) The condition is that, if a gain had arisen instead on the chargeable event—

(a) the individual would have been liable to income tax on the gain for the year, or

(b) the individual would have been so liable apart from the requirement in section 465(1) that the individual must be UK resident in the tax year in which the gain arises.

(3) The tax reduction is given effect at Step 6 of the calculation in section 23 of ITA 2007.

(4) See section 540 for the cases in which a deficiency is treated as arising from a policy or contract on a chargeable event, section 541 for how the deficiency is calculated and section 469(5) for the apportionment of deficiencies in cases where two or more persons are interested in a policy or contract.

(5) The amount of the tax reduction is calculated as follows.

Step 1Determine the amount of the individual’s income for the tax year that is liable at each relevant rate.

Step 2Attribute the amount or amounts determined at Step 1 to the deficiency, so far as possible.

Step 3Calculate the amount of the individual’s preliminary income tax liability for the tax year (see subsection (6)).

Step 4Calculate the amount of the individual’s preliminary income tax liability for the tax year again, on the assumption that each amount determined under Step 1, so far as attributed to the deficiency at Step 2, is liable at the appropriate lower rate.

Step 5Deduct the amount found at Step 4 from the amount found at Step 3. The result is the amount of the tax reduction.

(6) The individual's preliminary income tax liability is the amount found by calculating the individual's income tax liability in accordance with section 23 of ITA 2007, ignoring Steps 6 and 7 of that calculation.

(7) In this section—

(a) “relevant rate” means a rate mentioned in the first column of the Table;

(b) “the appropriate lower rate”, in relation to an amount of the individual’s income for the tax year that is liable at a relevant rate, means the rate mentioned in the second column of the Table in the same row as that relevant rate.

(8) Here is the Table referred to in subsection (7)—

Relevant rate	The appropriate lower rate
the higher rate	the basic rate
the default higher rate	the default basic rate
the savings higher rate	the savings basic rate
the dividend upper rate	the dividend ordinary rate
the Scottish higher rate	the Scottish basic rate
the Scottish advanced rate	the Scottish basic rate
the Welsh higher rate	the Welsh basic rate

(9) Where—

(a) it is possible to carry out Step 2 in subsection (5) by attributing amounts in more than one way, and

(b) the tax reductions, calculated under that subsection by carrying out that Step in those ways, are of different amounts,

Step 2 is to be carried out in the way that results in the highest tax reduction.

When deficiencies arise: events following calculation events

540

(1) A deficiency is treated as arising from a policy or contract on a chargeable event (“the later event”) if conditions A to C are met.

(2) Condition A is that the later event is an event within section 484(1)(a)(i) or (iii) or (b) to (e) (surrender of all rights, final participation in profits, death, maturity, or taking a capital sum as a complete alternative to annuity payments).

(3) Condition B is that a gain from the policy or contract has arisen on a calculation event other than a personal portfolio bond event, occurring in relation to the policy or contract in question before the later event.

(4) Condition C is that on the later event no gain is shown by the calculation in section 491(2) (calculation of gains for such events).

Calculation of deficiencies

541

(1) This section sets out how the amount of a deficiency treated as arising under section 540(1) on a chargeable event (“the later event”) is calculated.

(2) If, when the calculation in section 491(2) is made for the later event, the total allowable deductions equal or exceed the total benefit value, the amount of the deficiency is equal to the total previous gains.

(3) If, when that calculation is made, the total benefit value exceeds the total allowable deductions, the amount of the deficiency is equal to the total previous gains, less that excess.

(4) In this section “the total previous gains” means the total amount of gains that—

(a) were treated as arising on calculation events (other than personal portfolio bond events) occurring in relation to the policy or contract in question before the later event, and

(b) formed part of the total income of the individual mentioned in section 539(1) for a tax year earlier than the tax year mentioned in that section or formed part of the total income of that individual by virtue of section 465B for the tax year mentioned in section 539(1).

Supplementary

Replacement of qualifying policies

542

(1) A qualifying policy (“the replaced policy”) and a policy of life insurance (“the replacement policy”) which replaces the replaced policy are treated as a single policy for the purposes of sections 484 to 497 if conditions A to D are met.

(2) Condition A is that the replacement policy is also a qualifying policy under the rules in paragraph 17 of Schedule 15 to ICTA.

(3) Condition B is that the replacement results from a change in the life or lives insured.

(4) Condition C is that any sum becoming payable by the insurance company on or in connection with the termination of the replaced policy is retained by it and applied in the discharge of some or all of the liability for any premium becoming due under the replacement policy.

(5) Condition D is that no consideration in money or money's worth (other than the benefits for which provision is made by the replacement policy) is receivable by any person on or in connection with—

(a) the termination of the replaced policy, or

(b) the coming into existence of the replacement policy.

(6) The single policy is treated for the purposes of sections 484 to 497 as issued in respect of an insurance made at the time of the making of the insurance in respect of which the replaced policy was issued.

(7) So long as the replacement policy continues to be a qualifying policy, the single policy is also treated as a qualifying policy for those purposes.

(8) This section applies equally to a second or subsequent replacement policy.

(9) References in Schedule 2 (transitionals and savings) to—

(a) a policy of life insurance,

(b) the time of the making of the insurance in respect of which a policy of life insurance is issued, and

are to be read in accordance with this section.

Issue time of qualifying policy replacing foreign policy

543

(1) This section applies if—

(a) there has been a substitution of policies falling within paragraph 25(1) or (3) of Schedule 15 of ICTA (replacement of a policy issued by a non-UK resident company by a policy which is not so issued), and

(b) the new policy is a qualifying policy.

(2) The new policy is treated for the purposes of sections 484 to 497 as having been issued in respect of an insurance made on the day on which the insurance was made in respect of which the old policy was issued.

(3) References in Schedule 2 (transitionals and savings) to the time of the making of the insurance in respect of which a policy of life insurance is issued are to be read in accordance with this section.

Application of Chapter to policies and contracts in which companies interested

544

(1) This section applies where, for the purposes of determining the application of this Chapter in relation to a policy or contract at any time, it is necessary to have regard to its application at another time.

(2) It makes no difference to the application of this Chapter at that other time whether liability in respect of a gain arising at that time would have arisen or (as the case may be) would arise because of the application of this Chapter or the corporation tax provisions.

(3) In subsection (2) “the corporation tax provisions” means—

(a) Chapter 2 of Part 13 of ICTA (which makes provision for corporation tax purposes corresponding to that made by this Chapter),

(b) paragraph 20 of Schedule 15 to that Act (replacement of qualifying policies), and

Minor definitions

545

(1) In this Chapter—

“contract of insurance” has the meaning given by Article 3(1) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (S.I. 2001/544),

“friendly society” has the meaning given in the Friendly Societies Act 1992 (c. 40) and includes a society which under section 96(2) of that Act is to be treated as a registered friendly society,

“insurance company” means an undertaking carrying on the business of effecting or carrying out contracts of insurance,

“market value” has the meaning given by sections 272 and 273 of TCGA 1992,

“non-charitable trust” means a trust other than a charitable trust, and

“policy” means a policy of life insurance or a capital redemption policy.

(2) References in this Chapter to a premium include a reference to—

(a) lump sum consideration, and

(b) property other than cash transferred to the insurance company in satisfaction of a premium.

(3) References in this Chapter to the amount of premiums paid include a reference to—

(a) the amount of lump sum consideration paid by way of premium, and

(b) the market value at the date of transfer of property other than cash transferred to the insurance company in satisfaction of any premium.

Table of provisions subject to special rules for older policies and contracts

546

(1) Column 1 of the table in subsection (4) specifies provisions of this Chapter which are subject to Part 6 or 7 of Schedule 2 (transitionals and savings), and column 2 of the table specifies the provisions of that Schedule to which they are subject.

(2) See also paragraphs 85 to 91 of that Schedule.

(3) The provisions of that Schedule referred to in subsections (1) and (2) are to be read as if they were in this Chapter.

(4) This is the table—

Provisions of Chapter 9	Provisions of Schedule 2
Section 467	paragraph 112 (pre-17th March 1998 policies and contracts) and paragraph 114 (pre-9th April 2003 policies and contracts)
Section 473	paragraph 96 (exclusion of pre-20th March 1968 policies and contracts) and paragraph 102 (exclusion of certain pre-26th June 1982 policies and contracts)
Section 476(3)	paragraphs 103 and 111 (certain pre-18th November 1983 and pre-17th March 1998 policies not foreign policies of life insurance) and paragraphs 104 and 113 (certain pre-23rd February 1984 and pre-23rd March 1999 policies not foreign capital redemption policies)
Section 480	paragraph 116 (pre-9th April 2003 policies)
Section 484	paragraph 99 (pre-10th December 1974 contracts for a life annuity: disregard of death)
Section 485(2) and (3)	paragraph 107 (pre-14th March 1989 qualifying policies)
Section 494(1)	paragraph 105(a) (pre-14th March 1984 policies: disregard of amounts deducted and repaid after tax relief by deduction from premiums abolished)
Section 500(c)	paragraph 97 (disapplication in relation to pre-27th March 1974 policies and contracts) and paragraph 102(9) (exclusion of certain pre-26th June 1982 policies and contracts)
Section 501	paragraph 102(9) (exclusion of certain pre-26th June 1982 policies and contracts), paragraph 108 (pre-14th March 1989 policies and contracts) and paragraph 115 (pre-9th April 2003 policies and contracts: loans to trustees)
Section 507	paragraph 100 (pre-14th March 1975 policies and contracts) and paragraph 105(b) (pre-14th March 1984 policies: disregard of amounts deducted and repaid after tax relief by deduction from premiums abolished)
Section 516	paragraph 119 (pre-17th March 1998 policies and contracts)
Section 525	paragraph 124(3) (pre-17th March 1998 policies and contracts) and paragraph 125(3) (pre-17th March 1998 policies and contracts)
Section 529	paragraph 106 (disapplication of section 529(1)(a) and (b) for certain pre-20th March 1985 policies) and paragraph 110 (disapplication of section 529(1)(c) for certain pre-17th March 1998 policies)
Section 530	paragraph 109(2) (disapplication for contracts for life annuities made in accounting periods beginning before 1st January 1992)
Section 531	paragraph 98 (pre-27th March 1974 policies and contracts: disapplication of section 531(3)(c)) and paragraph 118 (pre-1st January 2005 contracts for immediate needs annuities: income tax treated as paid)
Section 539	paragraph 109(4) (contracts made in accounting periods beginning before 1st January 1992)
Section 541(4)	paragraph 117 (pre-3rd March 2004 contract or policy: calculation of deficiencies)
Section 542	paragraph 101 (disapplication in the case of pre-25th March 1982 replacement policies)

Chapter 10 — Distributions from unauthorised unit trusts

Charge to tax under Chapter 10

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income charged

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Person liable

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income tax treated as paid

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 11 — Transactions in deposits

Charge to tax on profits from disposal of deposit rights

551

(1) Income tax is charged on profits and gains from the disposal of deposit rights.

(2) For the purposes of this section, the exercise of a deposit right is a disposal of it....

Meaning of “deposit rights”

552

(1) In this Chapter “deposit rights” means—

(a) a right to receive, with or without interest, a principal amount stated in, or determined in accordance with, the current terms of issue of an eligible debt security, where in accordance with those terms the issue of uncertificated units of the eligible debt security corresponds to the issue of a certificate of deposit,

(b) a right to receive the principal amount stated in a certificate of deposit, with or without interest,

(d) a right which—

(i) is not within paragraph (c),

(ii) is acquired in a transaction in which no certificate of deposit or security or uncertificated eligible debt security units are issued, and

(iii) is a right to receive a principal amount payable with interest by a bank or similar institution or a person regularly engaging in similar transactions, ...

(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2) In this section—

“certificate of deposit” means a document—relating to the deposit of money in any currency,recognising an obligation to pay a stated principal amount to bearer or to order, with or without interest, andby the delivery of which, with or without endorsement, the right to receive that stated amount, with or without interest, is transferable,

“eligible debt security” has the meaning given in regulation 3(1) of the Uncertificated Securities Regulations 2001 (S.I. 2001/3755),

“security” (except in relation to an eligible debt security) includes any loan stock or similar security, whether secured or unsecured and whether issued by—the Government of the United Kingdom or another government,any local or other public authority in the United Kingdom or elsewhere, orany company,

“uncertificated”, in relation to a unit, has the meaning given in regulation 3(1) of the Uncertificated Securities Regulations 2001,

“uncertificated eligible debt security units” means uncertificated units of an eligible debt security where the issue of the units corresponds, in accordance with the current terms of issue of the eligible debt security, to the issue of a certificate of deposit,

“uncertificated right” means a right in respect of which no certificate of deposit has been issued, although the person for the time being entitled to it is entitled to call for the issue of such a certificate, and

“unit” has the meaning given in regulation 3(1) of the Uncertificated Securities Regulations 2001.

Income charged

553

Tax is charged under this Chapter on the full amount of profits or gains arising in the tax year.

Person liable

554

The person liable for any tax charged under this Chapter is the person receiving or entitled to the profits or gains.

Chapter 12 — Disposals of futures and options involving guaranteed returns

Charge to tax under Chapter 12

555

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income charged

556

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Person liable

557

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Meaning of “future”, “option” etc.

558

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

When disposals involve guaranteed returns

559

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Production of guaranteed returns

560

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The return from one or more disposals

561

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

When disposals of futures and options occur

When disposals of futures and options occur: general

562

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

563

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Deemed disposal where futures run to delivery or options are exercised

564

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Interpretation of section 564

565

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

566

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Losses

567

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Trustees

Special rule for certain income of trustees

568

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Transfer of assets abroad

Anti-avoidance: transfer of assets abroad

569

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Chapter 13 — Sales of foreign dividend coupons

Charge to tax under Chapter 13

570

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Meaning of “foreign holdings” etc.

571

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income charged

572

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Person liable

573

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Part 5 — Miscellaneous income

Chapter 1 — Introduction

Overview of Part 5

574

(1) This Part imposes charges to income tax under—

(a) Chapter 2 (receipts from intellectual property),

(aa) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(b) Chapter 3 (films and sound recordings: non-trade businesses),

(d) Chapter 5 (settlements: amounts treated as income of settlor),

(e) Chapter 6 (beneficiaries' income from estates in administration),

(f) Chapter 7 (annual payments not otherwise charged), and

(g) Chapter 8 (income not otherwise charged).

(2) Part 6 deals with exemptions from the charges under this Part ....

(3) See, in particular, any exemptions mentioned in the Chapters of this Part.

(4) The charges under this Part apply to non-UK residents as well as UK residents but this is subject to section 577(2) (charges on non-UK residents only on UK source income).

(5) This section needs to be read with the relevant priority rules (see sections 2, 575 and 576).

Provisions which must be given priority over Part 5

575

(1) Any income, so far as it falls within—

(a) any Chapter of this Part, and

(b) Chapter 2 of Part 2 (receipts of a trade, profession or vocation),

is dealt with under Part 2.

(2) Any income, so far as it falls within—

(a) any Chapter of this Part, and

(b) Chapter 3 of Part 3 so far as the Chapter relates to a UK property business,

is dealt with under Part 3.

(3) Any income, so far as it falls within—

(a) any Chapter of this Part, and

(b) Chapter 2 or 3 of Part 4 (interest and dividends etc. from UK resident companies etc.),

is dealt with under the relevant Chapter of Part 4.

(4) Any income, so far as it falls within—

(a) any Chapter of this Part, and

(b) Part 2, 9 or 10 of ITEPA 2003 (employment income, pension income or social security income),

is dealt with under the relevant Part of ITEPA 2003.

Priority between Chapters within Part 5

576

(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(2) Any income, so far as it falls within Chapter 2 (receipts from intellectual property) and Chapter 3 (films and sound recordings: non-trade businesses), is dealt with under Chapter 3.

Territorial scope of Part 5 charges

577

(1) Income arising to a UK resident is chargeable to tax under this Part whether or not it is from a source in the United Kingdom.

(2) Income arising to a non-UK resident is chargeable to tax under this Part only if it is from a source in the United Kingdom.

(2A) If income arising to an individual who is UK resident arises in the overseas part of a split year, it is to be treated for the purposes of this section as arising to a non-UK resident.

(3) References in this section to income which is from a source in the United Kingdom include, in the case of any income which does not have a source, references to income which has a comparable connection to the United Kingdom.

(4) This section is subject to any express or implied provision to the contrary in this Part (or elsewhere in the Income Tax Acts).

(5) See also section 577A (territorial scope of Part 5 charges: receipts from intellectual property).

Chapter 2 — Receipts from intellectual property

Introduction

Contents of Chapter

578

(1) This Chapter imposes charges to income tax under—

(a) section 579 (royalties and other income from intellectual property),

(b) section 583 (income from disposals of know-how), and

(2) For an exemption from the charge under section 579, see, in particular, section 727 (certain annual payments by individuals) ....

(3) This Chapter also provides for relief from income tax on patent income (see section 600).

Charge to tax on non-trading income from intellectual property

Charge to tax on royalties and other income from intellectual property

579

(1) Income tax is charged on royalties and other income from intellectual property.

(2) In this section “intellectual property” means—

(a) any patent, trade mark, registered design, copyright, design right, performer's right or plant breeder's right,

(b) any rights under the law of any part of the United Kingdom which are similar to rights within paragraph (a),

(c) any rights under the law of any territory outside the United Kingdom which correspond or are similar to rights within paragraph (a), and

(d) any idea, information or technique not protected by a right within paragraph (a), (b) or (c).

Income charged under section 579

580

(1) Tax is charged under section 579 on the full amount of the income arising in the tax year.

(2) Subsection (1) is subject to Part 8 (foreign income: special rules).

(3) See section 582 for provision about the calculation of the amount of income charged under section 579.

(4) This section needs to be read with section 527 of ICTA (spreading of patent royalties etc. over several years).

Person liable for tax under section 579

581

The person liable for any tax charged under section 579 is the person receiving or entitled to the income.

Deductions in calculating certain income charged under section 579

582

(1) This section applies for calculating the amount of income charged under section 579 other than annual payments.

(2) Expenses wholly and exclusively incurred for the purpose of generating the income are deductible.

(3) If an expense is incurred for more than one purpose, a deduction may be made for any identifiable part or identifiable proportion of the expense which is incurred wholly and exclusively for the purpose of generating the income.

(4) Expenses which would not have been allowable as a deduction in calculating the profits of a trade, if they had been incurred for its purposes, are not deductible under this section.

(5) Expenses for which any kind of relief is given under any other provision of the Income Tax Acts are not deductible under this section.

(6) The relief given under section 600 (relief for expenses: patent income) is additional to the relief under this section.

(7) The frequency with which payments are made is ignored in determining whether they are annual payments for the purposes of subsection (1).

Disposals of know-how

Charge to tax on income from disposals of know-how

583

(1) Income tax is charged on profits arising where consideration is received by a person—

(a) for the disposal of know-how, or

(b) for giving, or wholly or partly fulfilling, an undertaking which—

(i) is given in connection with a disposal of know-how, and

(ii) restricts or is designed to restrict any person's activities in any way.

(2) For the purposes of subsection (1)(b), it does not matter whether or not the undertaking is legally enforceable.

(3) Subsection (1) is subject to the exceptions in section 584.

(4) In this Chapter “know-how” means any industrial information or techniques likely to assist in—

(a) manufacturing or processing goods or materials,

(b) working a source of mineral deposits (including searching for, discovering or testing mineral deposits or obtaining access to them), or

(5) In subsection (4)—

(a) “mineral deposits” includes any natural deposits capable of being lifted or extracted from the earth and for this purpose geothermal energy is treated as a natural deposit, and

(b) “source of mineral deposits” includes a mine, an oil well and a source of geothermal energy.

Exceptions to charge under section 583

584

(1) Section 583 does not apply in the following cases.

(2) Case A is if the consideration is brought into account under—

(a) section 579 (charge to tax on royalties etc.), or

(b) section 462 of CAA 2001 (disposal values).

(3) Case B is if the consideration is dealt with in relation to the person receiving it as a capital receipt for goodwill under section 194(2) (disposal of know-how as part of disposal of all or part of a trade).

(4) Case C is if the disposal of the know-how is by way of a sale and—

(a) the buyer is a body of persons over which the seller has control,

(b) the seller is a body of persons over which the buyer has control, or

(5) In subsection (4) “body of persons” includes a firm.

(6) See also Chapter 14 of Part 2 and section 575 (disposals of know-how used in a trade dealt with by Part 2).

Income charged under section 583

585

(1) Tax is charged under section 583 on the full amount of the profits arising in the tax year.

(2) The profits charged under section 583 are—

(a) the amount of the consideration, less

(b) any expenditure incurred by the recipient wholly and exclusively in the acquisition or disposal of the know-how.

(3) Such expenditure may not be taken into account more than once, whether under this section or otherwise.

(4) This section needs to be read with section 603 (contributions to expenditure).

Person liable for tax under section 583

586

The person liable for any tax charged under section 583 is the person receiving the consideration.

Sales of patent rights

Charge to tax on income from sales of patent rights

587

(1) Income tax is charged on profits from sales of the whole or part of any patent rights.

(2) The tax is charged if—

(a) the seller is a UK resident, or

(b) the seller is a non-UK resident and the patent is granted under the laws of the United Kingdom.

(3) Where the seller is a non-UK resident company, tax is not charged if the seller is chargeable to corporation tax in respect of the proceeds of the sale.

(4) In this Chapter “patent rights” means the right to do or authorise the doing of anything which, but for the right, would be an infringement of a patent.

Income charged under section 587

588

(1) A seller's profits from the sale of the whole or part of patent rights are—

(a) any capital sum comprised in the proceeds of the sale, less

(b) the deductible costs.

(2) The deductible costs are—

(a) the capital cost (if any) of the rights sold, and

(b) any incidental expenses incurred by the seller in connection with the sale.

(3) If—

(a) the seller acquired the rights sold, or the rights out of which they were granted, by purchase,

(b) the seller has previously sold part of the purchased rights, and

the capital cost is reduced by that capital sum.

(4) References in this Chapter to the capital cost of patent rights are to any capital sum included in any price paid by the seller to purchase—

(a) the rights, or

(b) the rights out of which they were granted.

(5) This section needs to be read with sections 600 (relief for expenses: patent income) and 603 (contributions to expenditure).

Person liable for tax under section 587

589

The person liable for any tax charged under section 587 is the seller of the patent rights.

UK resident sellers: spreading rules

590

(1) This section applies if the person liable under section 587 is a UK resident.

(2) If the person does not receive the proceeds of sale in instalments, one-sixth of the amount chargeable is taxed in the tax year in which the person receives the proceeds of the sale and in each of the next 5 tax years.

(3) The person may elect to be taxed instead on the whole of the amount chargeable under section 587 in the tax year in which the person receives the proceeds of sale.

(4) If the person receives the proceeds of sale in instalments, one-sixth of the amount chargeable in respect of each instalment is taxed in the tax year in which the person receives the instalment and in each of the next 5 tax years.

(5) The person may elect to be taxed instead on the whole of any instalment in the tax year in which the person receives it.

(6) An election under subsection (3) or (5) must be made on or before the first anniversary of the normal self-assessment filing date for that tax year.

Non-UK resident sellers: election for spreading

591

(1) If the person liable under section 587—

(a) is a non-UK resident, and

(b) does not receive the proceeds of sale in instalments,

the whole amount chargeable is taxed in the tax year in which the person receives the proceeds.

(2) The person may elect to be taxed instead on one-sixth of the amount chargeable in the tax year in which the person receives the proceeds of sale and in each of the next 5 tax years.

(3) An election under subsection (2) must be made on or before the first anniversary of the normal self-assessment filing date for the tax year in which the proceeds of sale are received.

(4) Such repayments and assessments are to be made for each of the tax years affected as are necessary to give effect to the election.

(5) Subsection (4) is subject to the qualifications in section 596 (adjustments where tax has been deducted).

Further provision about elections for spreading: instalments

592

(1) If the person liable under section 587—

(a) is a non-UK resident, and

(b) receives the proceeds of sale in instalments,

the amount chargeable in respect of each instalment is taxed in the tax year in which the person receives the instalment.

(2) The person may, for any instalment, elect to be taxed instead on one-sixth of the amount chargeable in respect of the instalment in the tax year in which the person receives it and in each of the next 5 tax years.

(3) An election under subsection (2) must be made on or before the first anniversary of the normal self-assessment filing date for the tax year in which the instalment is received.

(4) Such repayments and assessments are to be made for each of the tax years affected as are necessary to give effect to the election.

(5) Subsection (4) is subject to the qualifications in section 596 (adjustments where tax has been deducted).

Death of seller

593

(1) If a seller who is liable to income tax under section 587 dies, any amounts which would have been chargeable in later tax years under—

(a) section 590(2) or (4) (UK resident sellers: spreading rules), or

(b) section 591(2) or 592(2) (non-UK resident sellers: elections for spreading),

are taxed in the tax year in which the seller dies.

(2) The personal representatives may elect that the tax payable by reason of subsection (1) be reduced to the total amount of income tax that the seller and the estate would have been liable to pay if the amounts chargeable by reason of that subsection had been taxed in equal parts in each of the lifetime tax years.

(3) In subsection (2) “the lifetime tax years” means—

(a) the tax year in which the seller received the proceeds or, as the case may be, the instalment, and

(b) each of the next tax years up to and including that in which the seller died.

(4) An election under subsection (2) must be made on or before the first anniversary of the normal self-assessment filing date for the tax year in which the death occurs.

Winding up of a body corporate

594

(1) If a body corporate which is liable to income tax under section 587 commences to be wound up, any amounts falling within subsection (2) are taxed in the year in which the winding up commences.

(2) The amounts are—

(a) any amounts which would have been chargeable in later tax years under section 591(2) or 592(2), and

(b) any amounts (arising to the body in a fiduciary or representative capacity) which would have been chargeable in later tax years under section 590(2) or (4).

Deduction of tax from payments to non-UK residents

595

(1) This section applies if a person who is a non-UK resident is liable to tax under section 587 on profits from the sale of the whole or part of any patent rights.

(2) The rules in section 588 allowing the capital cost (if any) of the rights sold to be deducted in calculating the profits from the sale do not affect the amount of income tax which is to be deducted under section 910 of ITA 2007

(3) No election made by the seller under section 591(2) or 592(2) (election for spreading) in relation to the proceeds of sale or any instalment affects the amount of income tax which is to be deducted under section 910 of ITA 2007

(a) deducted from the proceeds of sale or instalment under section 349(1) of ICTA, and

(b) assessed under section 350 of that Act.

Adjustments where tax has been deducted

596

(1) Where any sum has been deducted from a payment by virtue of section 595(2), any adjustment necessary—

(a) because of section 595(2), or

(b) because of an election under section 591(2) or 592(2),

must be made by way of repayment of tax.

(2) Adjustments necessary to give effect to an election under section 591(2) or 592(2) must be made year by year, treating one-sixth of the sum deducted from the proceeds of sale or instalment as income tax paid for each of the 6 years.

(3) No repayment is to be made of any tax treated under subsection (2) as income tax paid for a particular year unless and until it is ascertained that the income tax ultimately falling to be paid for that year is less than the amount which was paid for that year.

Licences connected with patents

597

(1) The acquisition of a licence in respect of a patent is treated for the purposes of sections 587 to 596 as a purchase of patent rights.

(2) The grant of a licence in respect of a patent is treated for the purposes of sections 587 to 596 as a sale of part of patent rights.

(3) But the grant by a person entitled to patent rights of an exclusive licence is treated for the purposes of sections 587 to 596 as a sale of the whole of those rights.

(4) In subsection (3) “exclusive licence” means a licence to exercise the rights to the exclusion of the grantor and all other persons for the period remaining until the rights come to an end.

Rights to acquire future patent rights

598

(1) If a sum is paid to obtain a right to acquire future patent rights, then for the purposes of sections 587 to 596—

(a) the payer is treated as purchasing patent rights for that sum, and

(b) the recipient is treated as selling patent rights for that sum.

(2) If a person—

(a) pays a sum to obtain a right to acquire future patent rights, and

(b) subsequently acquires those rights,

the expenditure is to be treated for the purposes of sections 587 to 596 as having been expenditure on the purchase of those rights.

(3) In this section “a right to acquire future patent rights” means a right to acquire in the future patent rights relating to an invention in respect of which the patent has not yet been granted.

Sums paid for Crown use etc. treated as paid under licence

599

(1) This section applies if an invention which is the subject of a patent is used by or for the service of—

(a) the Crown under sections 55 to 59 of the Patents Act 1977 (c. 37), or

(b) the government of a country outside the United Kingdom under corresponding provisions of the law of that country.

(2) The use is treated for the purposes of sections 587 to 596 as having taken place under a licence.

(3) Sums paid in respect of the use are treated for the purposes of sections 587 to 596 as having been paid under a licence.

Relief from income tax on patent income

Relief for expenses: patent income

600

(1) Relief may be claimed under this section for—

(a) inventor's expenses, and

(b) patent application and maintenance expenses.

(2) In this section “inventor's expenses” means expenses which—

(a) have been incurred by an individual who, alone or jointly, devised an invention for which a patent has been granted, and

(b) are attributable to devising it.

(3) In this section “patent application and maintenance expenses” means expenses incurred by a person in connection with—

(a) the grant or maintenance of a patent,

(b) the extension of the term of a patent, or

but not incurred for the purposes of any trade carried on by the person.

(4) Relief may not be claimed under this section for patent application and maintenance expenses unless they are expenses which would, if incurred for the purposes of a trade, have been allowable as a deduction in calculating the profits of the trade.

(5) Relief may not be claimed under this section for any expenses if relief for them is given under—

(a) section 582 (calculation of income for the purposes of the charge to tax on royalties etc.), or

(b) any other provision of the Tax Acts.

(6) This section needs to be read with section 603 (contributions to expenditure).

How relief is given under section 600

601

(1) This section sets out how relief for expenses is given where a person makes a claim under section 600.

(2) The amount of the expenses must be deducted from or set off against the person's income from patents for the tax year in which the expenses were incurred.

(2A) The deduction or set-off is given effect at Step 2 of the calculation in section 23 of ITA 2007.

(3) If the amount to be allowed is greater than the amount of the person's income from patents for that tax year, the excess must be deducted from or set off against the person's income from patents for the next tax year, and so on for subsequent tax years, without the need for a further claim.

(4) In this section “income from patents” means—

(a) royalties or other sums paid in respect of the use of a patent (whether chargeable under this Chapter or otherwise),

(b) amounts on which tax is payable under section 587, 593 or 594, and

(i) section 472(5) of CAA 2001 (patent allowances: balancing charges), or

(ii) paragraph 100 of Schedule 3 to that Act (balancing charges in respect of pre-1st April 1986 expenditure on the purchase of patent rights).

(5) In this section references to a person's income from patents are to the income after any allowance has been deducted from or set off against it under section 479 of CAA 2001 (certain allowances against income from patents).

Payments received after deduction of tax

602

In accordance with section 848 of ITA 2007, a sum representing income tax deducted under either of the following Chapters from a payment of royalties or other income within this Chapter is treated as income tax paid by the recipient —

Chapter 6 of Part 15 of ITA 2007 (deduction from annual payments and patent royalties), and

Chapter 7 of that Part (deduction from other payments connected with intellectual property).

Supplementary

Contributions to expenditure

603

(1) For the purposes of sections 585, 588 and 600, the general rule is that a person (“A”) is to be regarded as not having incurred expenditure so far as it has been, or is to be, met (directly or indirectly) by—

(a) a public body, or

(b) a person other than A.

(2) In this Chapter “public body” means the Crown or any government, local authority or other public authority (whether in the United Kingdom or elsewhere).

(3) The general rule does not apply to the expenses mentioned in section 588(2)(b) (incidental expenses incurred by a seller of patent rights).

(4) The general rule is subject to the exception in section 604.

Contributions not made by public bodies nor eligible for tax relief

604

(1) A person (“A”) is to be regarded as having incurred expenditure (despite section 603(1)) so far as the requirements in subsections (2) and (3) are met in relation to the expenditure.

(2) The first requirement is that the person meeting A's expenditure (“B”) is not a public body.

(3) The second requirement is that—

(a) no allowance can be made under Chapter 2 of Part 11 of CAA 2001 (contribution allowances) in respect of B's expenditure, and

(b) the expenditure is not allowed to be deducted in calculating the profits of a trade, profession or vocation carried on by B.

(4) When determining for the purposes of subsection (3)(a) whether such an allowance can be made, assume that B is within the charge to tax.

Exchanges

605

(1) In this Chapter references to the sale of property include the exchange of property.

(2) In this section—

references to property include know-how, and

references to the sale of property include the disposal of know-how.

(3) For the purposes of subsection (1), any provision of this Chapter referring to a sale has effect with the necessary modifications, including, in particular, those in subsections (4) and (5).

(4) References to the proceeds of sale and to the price include the consideration for the exchange.

(5) References to capital sums included in the proceeds of sale include references to so much of the consideration for the exchange as would have been a capital sum if it had been a money payment.

Apportionment where property sold together

606

(1) Any reference in this Chapter to the sale of property includes the sale of that property together with other property.

(2) In this section—

references to property include know-how, and

references to the sale of property include the disposal of know-how.

(3) For the purposes of subsection (1), all property sold as a result of one bargain is to be treated as sold together even though—

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Income Tax (Trading and Other Income) Act 2005

Chargeable events where transaction-related calculations show gains

514

Personal portfolio bonds

Requirement for annual calculations in relation to personal portfolio bonds 9

515

Meaning of “personal portfolio bond”

516

Policies and contracts which are not personal portfolio bonds

517

The index categories

518

The index selection conditions

519

The property categories

520

The property selection conditions

521

Method for making annual calculations under section 515

522

The total amount of personal portfolio bond excesses

523

The total amount of part surrender gains

524

Chargeable events where annual calculations show gains

525

Power to make regulations about personal portfolio bonds

526

Reductions from gains

Reduction for sums taken into account otherwise than under Chapter 9

527

Reduction in amount charged: non-UK resident policy holders

528

Exceptions to section 528

529

Income tax treated as paid and reliefs

Income tax treated as paid etc.

530

Exceptions to section 530

531

Relief for policies and contracts with European Economic Area insurers

532

Meaning of “comparable EEA tax charge”

533

Regulations providing for relief in other cases where foreign tax chargeable

534

Top slicing relief

535

Top slicing relieved liability: one chargeable event

536

Top slicing relieved liability: two or more chargeable events

537

Recovery of tax from trustees

538

Deficiencies

Relief for deficiencies

539

When deficiencies arise: events following calculation events

540

Calculation of deficiencies

541

Supplementary

Replacement of qualifying policies

542

Issue time of qualifying policy replacing foreign policy

543

Application of Chapter to policies and contracts in which companies interested

544

Minor definitions

545

Table of provisions subject to special rules for older policies and contracts

546

Chapter 10 — Distributions from unauthorised unit trusts

Charge to tax under Chapter 10

Income charged

Person liable

Income tax treated as paid

Chapter 11 — Transactions in deposits

Charge to tax on profits from disposal of deposit rights

551