Income Tax (Trading and Other Income) Act 2005

Income Tax (Trading and Other Income) Act 2005

2005 CHAPTER 5

Commentary on Sections

Part 6: Exempt income

Chapter 8: Other Annual Payments

Section 729: Payments for non-taxable consideration

2799. This section also provides an exception to the exemption in section 727. It is based on section 347A(2)(d) of ICTA which provides that a payment to which section 125(1) of ICTA applies is not exempt from income tax.

2800. However, to work out whether this exception to the exemption applies, the reader has to work out whether section 125(1) of ICTA applies and this is not straightforward.

2801. Section 125(1) of ICTA applies to any payment which is an annuity or other annual payment (other than interest) taxable under Schedule D Case III and which is made in return for consideration which is not taxable in the payer’s hands. But that section does not apply to:

(a)

payments which (in the recipient’s hands) are income within section 660A(8) or (9)(a) of ICTA (certain payments on divorce or separation);

(b)

payments made to an individual in consideration of the surrender, assignment or release of an interest in settled property to or in favour of a person having a subsequent interest;

(c)

any annuity granted in the ordinary course of a business of granting annuities; and

(d)

any annuity charged on an interest in settled property and granted at any time before 30 March 1977 by an individual to a company whose business at that time consisted wholly or mainly in the acquisition of interests in settled property or which was at that time carrying on life assurance business in the United Kingdom.

2802. In other words, if the payment falls within paragraphs (a) to (d), it will not fall within section 125(1) of ICTA and the payment therefore falls within the exemption.

2803. Section 729 rewrites section 347A(2)(d) of ICTA by incorporating the relevant propositions of section 125(1) of ICTA rather than cross-referencing to that section and leaving the reader to work out if it applies. So, if the payment is made for non-taxable consideration (as defined in subsection (2)), the payment is exempt in the recipient’s hands if either condition B or condition C is met. Subsection (3) is based on section 125(3)(a) of ICTA and subsection (4) is based on section 125(3)(b) of ICTA.

2804. Section 125(3)(c) of ICTA is not rewritten as an individual would not be authorised to grant annuities in the ordinary course of a business of granting annuities (and if an individual could do so, such a payment would fall within section 728).

2805. Subsections (3)(d) and (5) of section 125 of ICTA are not rewritten in section 729 but have been included in the transitionals Schedule (see paragraph 147 of Schedule 2 to this Act).