UK: Weekly Tax Update - Monday 8 October 2012

Last Updated: 10 October 2012
Article by Richard Mannion


1.1. Changes to the income tax rules on interest

HMRC has published a summary of the responses received to the consultation on possible changes to the income tax rules on interest which includes the proposals that Government intends to take forward.

The aim of the consultation was to seek views on possible changes to the charge to income tax on interest under Part 4 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA), and the requirement to deduct income tax from interest and other payments in accordance with Part 15 of the Income Tax Act 2007 (ITA). The consultation document made proposals for changes to the following aspects of the taxation of interest:

  • Interest included in compensation payments would be subject to deduction of income tax at source.
  • References to 'yearly' interest in Part 15 of ITA would be removed, and changes made to the meaning of the term 'arising in the UK'.
  • The exemption from the requirement to deduct income tax from quoted Eurobonds would be restricted where such bonds were held between companies in the same group.
  • 'Interest-in-kind' would be subject to deduction of income tax at source in cash, and the rules on funding bonds aligned with such treatment.
  • Legislation would be introduced on 'disguised interest'.

Many responses made the comment in relation to all the proposals in the consultation, that any changes would need to be accompanied by improvements to HMRC's guidance, and that due provision for commencement, transitional rules and 'grandfathering' provisions would be needed to minimise the impact on existing arrangements.

The document set out the proposals the Government intends to take forward from the consultation. In summary, legislation will be introduced in Finance Bill 2013 on:

  • deduction of tax from interest included in compensation payments;
  • specialty debt (to make it clear that the location of the debt instrument or deed has no bearing on whether interest arises in the UK for withholding tax purposes);
  • interest in kind & funding bonds (to distinguish between the two and require a certificate of value to be given at issue of the interest in kind or funding bond);
  • disguised interest to align the income tax rules more with the corporation tax rules.

The proposals in the consultation document on 'yearly' interest, the quoted Eurobond exemption and cash payment of tax on funding bonds will not be taken forward. A further consultation will take place on simplifying the deep discounted bond and accrued income scheme rules, with the aim of introducing any new legislation required in Finance Bill 2014. The Government will further consider the circumstances where there is withholding tax on cross border interest flows.

1.2. Contractual Disclosure Facility

HMRC has changed the address for sending in the form CDF1, Contractual Disclosure Facility (voluntary). The new postal address for sending in the form is:

HM Revenue & Customs
PO Box 4362
CF14 8JE
Fax number: 0117 915 3576

1.3. David Gauke MP on taxation for the 21st century

Exchequer Secretary to the Treasury gave a speech to the Chartered Institute of Payroll Professionals on 5 October on taxation for the 21st century. He covered:

  • Modernising PAYE
  • Real time information
  • Modernising the personal tax system
  • Tax and transparency
  • Income tax and NIC integration.

With regard to tax transparency and income tax and NIC integration he commented:

"Jean Baptiste Colbert, the Minister of Finance under King Louis XIV famously said that 'The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing"

That certainly seems to have been the approach taken in the recent past, with a persistent policy of keeping tax and National Insurance separate, even though for most intents and purposes, they fall on the same base and go to the same place – the Exchequer. That allowed the previous government to keep headline income tax rates low, despite raising taxes on income.

But I believe people should know how many feathers have been plucked. That is my motivation for tax transparency, and underpins our approach to Income Tax and NICs integration."


2.1. Private residence relief

The First-tier Tribunal has recently considered two cases involving claims to private residence relief for CGT purposes, namely John and Sylvia Regan (TC02246) and Daniel Regan (TC02247). Daniel is the son of Mr and Mrs Regan and the appeals concerned two adjacent properties and whether they had been the taxpayers' only or main residences.

Daniel Regan – 95 Rowan Avenue

HMRC noted that Daniel appeared on the voters list at his parents' address during the period under review and HMRC also alleged that all post went to and from the parent's home. It clearly didn't help their case when Daniel found copies of correspondence that showed HMRC had in fact written to him at 95 Rowan Avenue!

HMRC relied partly on a non-tax case, but the tribunal was more persuaded by the tax case of Moore v Thompson.

"The meaning of the word residence was also considered in the non-tax case of Ricketts v Registration Officer for the City of Cambridge [1970] 2 QB 463. Under the Representation of the People Act 1948, entitlement to vote was given to persons resident in a constituency on a qualifying date. The question to be decided was whether students should be resident in the constituency of the University that they attended. In the Court of Appeal, Lord Widgery commented;

"This conception of residence is of a place where a man is based or where he continues to live, the place where he sleeps and shelters and has his home. It is imperative to remember in this context that 'residence' implies a degree of permanence. In the words of the Oxford English Dictionary, it is concerned with something which will go on for a considerable time. Consequently a person is not entitled to claim to be a resident at a given town merely because he pays a short, temporary visit. Some assumption of permanence, some degree of continuity, some expectation of continuity, is a vital factor which turns simple occupation into residence."

In our view, the need for permanence or continuity should not be overstated. In Moore v Thompson [1986] STC 170, Millett J commented at 176 that;

"... the Commissioners were alive to the fact that even occasional and short residence in a place can make that a residence; but the question was one of fact and degree."

We consider that the issue of whether a property is or has been a residence is a matter of fact that should be determined by reference to the quality (and not merely the length) of the occupation."

The tribunal decided that the property had been Daniel's only or main residence from 1994 until April 1998 when he purchased a property with his girlfriend.

Mr and Mrs Regan – 93 Rowan Avenue

Mr and Mrs Regan lived at 91 Surrenden Road, Brighton until it was sold on 2 August 1999. They then stayed with friends until they bought 95 Rowan Avenue, Hove from their son Daniel in May 2000. Mr and Mrs Regan lived at 95 Rowan Avenue from May 2000 until June 2003.

In September 2002, Mr and Mrs Regan purchased 7 Woodland Drive, Hove with the aid of a mortgage. At that time, 7 Woodland Drive was uninhabitable. Throughout the next two years, Mr and Mrs Regan carried out works to the house, funded by further advances from the bank.

In February 2003, a company in which they were shareholders obtained planning permission to develop the site at the rear of Rowan Avenue. One of the conditions of that permission was that the access road had to be widened, which made it necessary to demolish 95 Rowan Avenue. Also in February 2003, the house next door to 95 Rowan Avenue, 93 Rowan Avenue, was put up for auction. Mr and Mrs Regan bought 93 Rowan Avenue by private contract before the auction. At around the same time, Mr and Mrs Regan sold 95 Rowan Avenue to a company in which they were shareholders which subsequently demolished the property in order to develop the site.

Before moving into 93 Rowan Avenue and while still living in 95 Rowan Avenue, Mr and Mrs Regan carried out some work to make 93 Rowan Avenue habitable as it needed complete modernisation. It had no heating, a very old fashioned bathroom and an old fashioned kitchen. They installed a new kitchen, bathroom and gas central heating. They also decorated it, laid new carpets and installed double-glazed windows. Mr and Mrs Regan moved into 93 Rowan Avenue in June 2003 and lived there until April 2004.

In April 2004, Mr and Mrs Regan moved into 7 Woodland Drive, Hove. After they had moved out, Mr and Mrs Regan added an extension to 93 Rowan Avenue. On 29 August 2006, Mr and Mrs Regan sold 93 Rowan Avenue.

HMRC contended that the disposal of 93 Rowan Avenue was a trading transaction so that the proceeds were subject to income tax. Alternatively, if the disposal was a capital transaction, HMRC contended that 93 Rowan Avenue was not Mr and Mrs Regan's only or main residence so that no relief from CGT was available under Section 222 TCGA.

HMRC argued that Mr Regan was a builder by trade and pointed out that the previous property 95 Rowan Avenue had been disposed of as part of a development. They also pointed to the fact that work had been carried out on the property both before and after the period of occupation and noted that Mr and Mrs Regan occupied the property for just 10 months out of the total period of ownership of 41 months.

The tribunal decided that the sale of 93 Rowan Avenue was not a trading transaction.

HMRC argued that 93 Rowan Avenue never became a residence of Mr and Mrs Regan notwithstanding the fact that they lived there between June 2003 and April 2004. As in the case of Daniel, HMRC relied partly on the non-tax case of Ricketts v Registration Officer for the City of Cambridge, but the tribunal was more persuaded by the tax case of Moore v Thompson.

The tribunal decided that Mr and Mrs Regan were entitled to private residence relief as follows:

"In his submissions, Mr Colin Williams for HMRC acknowledged that the occupation of 93 Rowan Avenue by Mr and Mrs Regan was closer to the line than in Goodwin where the taxpayer took up temporary residence, having separated from his wife, for five weeks until he found somewhere to live. Mr Williams submitted that 93 Rowan Avenue was a stop gap (the term used in Goodwin) until Mr and Mrs Regan could live in 7 Woodland Drive. We accept that Mr and Mrs Regan always intended to move into 7 Woodland Drive when they could do so. In our view, however, that intention does not disqualify 93 Rowan Avenue from being a residence. Mr Regan's evidence was that 7 Woodland Drive was uninhabitable from when it was bought until when he and his wife moved in to the property. We accept that evidence and have no doubt that during much of the period that they were in 93 Rowan Avenue, Mr and Mrs Regan would not have known when 7 Woodland Drive would be ready for occupation. In those circumstances and in view of the fact that Mr and Mrs Regan were in occupation at 93 Rowan Avenue for nine to ten months, we consider that it was more than a stop gap or temporary place of occupation but where they lived ie their residence.

Mr and Mrs Regan moved out of 93 Rowan Avenue in April 2004 and sold the property in August 2006. As April 2004 fell within the last 36 months of Mr and Mrs Regan's period of ownership, the fact that they did not live there up to the date of the sale does not affect the availability of the relief from CGT under section 222(1) TCGA. On the facts of this case, Mr and Mrs Regan were entitled to relief from CGT on the sale of 93 Rowan Avenue."


3.1. HMRC Inheritance Tax Toolkit

HMRC has updated its IHT Toolkit, which is effective for deaths occurring from 6 April 2012 when preparing the Inheritance Tax account Form IHT400.

The principal additions are:

14. Have you checked that any pension scheme lump sum death benefits have been included on form IHT409?


Full details of all lump sum death benefits paid from the deceased's pension schemes should be reported on form IHT409 whether or not they are chargeable to Inheritance Tax. This is frequently overlooked.


Raise enquiries with each of the deceased's pension scheme providers to establish whether a lump sum death benefit was paid, the amount that was paid and the beneficiary of any payment.

The pension scheme provider should be able to advise whether the payment was made at their discretion or you may need to check the scheme rules to see if any such payment is discretionary. You should let us have copies of any such evidence obtained.


Some lump sum death benefit payments are chargeable to Inheritance Tax whether or not the payment is made to the estate. A payment that is made to the estate or the personal representatives as of right is chargeable. Similarly, if the deceased pension scheme member had a general power to direct such a payment to specified beneficiaries with a binding nomination, it is within the estate and chargeable. Where a payment is made at the discretion of the pension scheme trustees or providers, it is not within the estate and therefore not chargeable to Inheritance Tax. If you do not complete all the boxes on the form or fail to send in the relevant supporting evidence we may need to raise enquiries.

For further guidance see IHTM17000+

22. Have you checked the calculation for the Inheritance Tax to ensure it is accurate?

how to apply the reduced rate of Inheritance Tax where the deceased leaves at least 10% of their net estate to charity (applies for deaths on or after 6 April 2012) - see IHTM45000.


4.1. Consultation on cultural tests for animation, video games and high end TV

The Department of Culture, Media and Sports has issued a consultation on the cultural tests for the proposed Finance Bill 2013 tax relief incentives for the animation, video games and high end TV sectors. The deadline for responses in 29 October 2012.

The proposal is that points will be awarded in following areas:

  • Cultural content (British or European). For animation and video games the measure will be based, amongst other things, on whether the game is set in the UK/EEA, or a fictionalised representation of this, or a place in the world that cannot be determined. For high end TV this aspect will include whether the production is set in the UK or an EEA area.
  • Cultural contribution (for those elements of the production which demonstrate British creativity, British heritage or cultural diversity)
  • Cultural hubs (measuring the use of the UK's animation making facilities, video games-making facilities, or high end TV-making facilities)
  • Cultural practitioners (measuring the use of UK or EEA personnel with creative input to the cultural value of animation, video games, or high end TV.

The test will be passed if 16 points is achieved from a possible total of 30 (video games) or 31 (animation and high end TV).


NTBN234 - High income child benefit charge (short)

Overview of the key elements of the child benefit claw back charge and election not to receive child benefit.

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