Income Tax (Trading and Other Income) Act 2005

Deficiencies U.K.

[F1 539 Relief for deficiencies U.K.

(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 [F2 one or more [F3 relevant rates]] for the tax year, and

(c) the individual makes a claim.

(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.

[F4 (5) The amount of the tax reduction is calculated as follows.

• Step 1

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

• Step 2

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

• Step 3

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

• Step 4

  Calculate 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 5

  Deduct 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.

[F5 (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.]]

Textual Amendments

F1 S. 539 substituted (6.4.2007 with effect as stated in s. 1034(1) of the amending Act) by Income Tax Act 2007 (c. 3), ss. 1027, 1034, Sch. 1 para. 539 (with transitional provisions and savings in Sch. 2)

F2 Words in s. 539(1)(b) substituted (with effect in accordance with art. 1(2) of the amending S.I.) by The Scottish Rate of Income Tax (Consequential Amendments) Order 2015 (S.I. 2015/1810), arts. 1(1), 9(2)

F3 Words in s. 539(1)(b) substituted (5.12.2024 for the tax year 2024-25 and subsequent tax years) by The Scottish Rates of Income Tax (Consequential Amendments) Order 2024 (S.I. 2024/1289), arts. 1(1), 2(2)

F4 S. 539(5) substituted (5.12.2024 for the tax year 2024-25 and subsequent tax years) by The Scottish Rates of Income Tax (Consequential Amendments) Order 2024 (S.I. 2024/1289), arts. 1(1), 2(3)

F5 S. 539(7)-(9) substituted for s. 539(7) (5.12.2024 for the tax year 2024-25 and subsequent tax years) by The Scottish Rates of Income Tax (Consequential Amendments) Order 2024 (S.I. 2024/1289), arts. 1(1), 2(4)

540 When deficiencies arise: events following calculation events U.K.

(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).

541 Calculation of deficiencies U.K.

(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 [F6 or formed part of the total income of that individual by virtue of section 465B for the tax year mentioned in section 539(1)].

Textual Amendments

F6 Words in s. 541(4)(b) inserted (with effect in accordance with Sch. 45 para. 153(3) of the amending Act) by Finance Act 2013 (c. 29), Sch. 45 para. 143