CHARITY LAW
ASSOCIATION

Tax Law Re-write

Working Party

Introduction

HM Revenue and Customs
have produced draft provisions (‘the new version’) to replace the
current sections 587B and 587C of the Income and Corporation Taxes
Act 1988 (‘the current version’) in relation to individuals.
These provisions address income tax relief on gifts of qualifying
securities and real property to charities. The aim of the new
version is not to change the law in relation to the tax treatment of
such gifts but to present it in a way that is more comprehensible.

Significantly, the new
version will only deal with transfers made by individuals; the
current version deals with transfers made by both individuals and by
companies. The provisions in relation to transfers by companies will
remain unchanged in sections 587B and 587C of ICTA 1988 pending a
corporation tax law re-write.

The new version, which
will form part of a more general Bill on income tax, is to be split
into manageable portions. The current version comprises a series of
sub-sections entirely devoid of partitions or headings. The new
version is therefore welcome as easier to navigate. Each of the five
general areas into which it is divided bears an overall title; in
addition each section is allocated a discrete title.

The new version begins
by describing both the circumstances in which the relief is available
and the relief itself. It then goes on to describe the types of
property on which relief is available before giving the calculations
for the amount of the relief.

The current version
goes straight into calculations of the amount of relief available
after specifying the circumstances in which the relief is available
and the relief itself, leaving the definitions of the types of
property on which relief is available to the end of the section,
where the various definitions are contained.

There is a certain
logic in the new format but readers will perhaps expect to find
definitions at the end either of the section itself or of the whole
Act, even if these definitions merely serve to direct the reader to
the relevant section in which a fuller explanation is contained. We
note from the explanatory notes, paragraph 13, that “authorised
unit trust” and “recognised stock exchange” will be defined in
general interpretation provisions material covering the whole of the
Bill. We would suggest that all defined terms in this part of the
Bill should be included in the general interpretation provisions.
This will aid navigation of the provisions.

Top slicing
relief

We note that clause
1(3) contains a signpost to section 535(7) ITTOIA. This sub-section
is inserted by the consequential amendments in the Schedule. The
provisions ensuring that this relief is excluded from computations
for top slicing relief are to be transferred to section 535 ITTOIA.
Although this adds to the bulk and the complexity of section 535
ITTOIA, we welcome this move as it will bring the fact to the
immediate attention of those computing relief under sections 535 to
537 ITTIOA that this relief has no effect on top slicing relief i.e.
they would have to opt for one or the other.

Calculation of
amount of relief

The new version
sensibly simplifies the position by reducing the calculation of the
“relievable amount” (previously the “relevant amount”) to an
algebraic formula in substitution for the current, narrative
description. Two such formulae are provided: one for the case where
the transfer is a gift and one for the case where it is a sale at an
undervalue. If effective, these formulae will be welcome. However,
the formulae currently include terms such as “VNBC” and “EIC”.
These acronyms are perhaps excessively suggestive of products (eg V
x N x B x C). Given that each term is defined, it would seem simpler
and clearer to use single letter symbols such as “A + B - C” or
“x + y - z”.

A further concern, and
perhaps a graver one, is prompted by the definition of the terms of
the formulae.

VNBC, for example, is
briefly defined immediately beneath the formula in clause 4(1) but is
discussed in greater depth in clause 7 which is itself supplemented
by clauses 8 to 10. This cannot be inferred simply by reading clause
4(1). It would therefore seem sensible to add words such as “as
described further in section 7” to the definition of VNBC in clause
4(1).

In clause 4(2), the
term “E” comprises a sum in itself. As this sum is described in
words rather than being defined by a formula, it detracts somewhat
from the effect of using formulae. We would therefore suggest
replacing “E” by “(VNBC – C)” or a simplified equivalent as
suggested above.

As regards the attempt
to define EIC (or any revised formula to replace it on the lines
suggested above) we feel that the definition contained in section
587B(7) might in fact be clearer and ought therefore perhaps to be
retained.

Cross-referencing

In the current version,
various terms are defined by cross-reference to other parts of the
same statute or other statutes. Examples comprise “consideration”
in section 587B(7)(b) ICTA and the definition of “incidental costs”
in section 587B(9). In the new version, the relevant explanation of
these terms is set out in full. We welcome this addition. Although
it adds length to the provisions, it allows the reader immediately to
establish the meanings of these terms i.e. without having to look to
other statutes in order to do so.

With reference to
clause 4(2)(a), it is apprehended that clarity would best be served
either by setting out the wording of section 257(2)(a) of TCGA 1992
in full or, alternatively, of expanding the wording in brackets i.e.,
“(gifts to charities etc)” to provide a clear summary of that
section to the extent that it is applicable to clause 4(2)(a).

Results of
splitting transfers by individuals from transfers by companies

Some complications
appear to have arisen as a result of the separation of the provisions
dealing with transfers by companies from those dealing with transfers
by individuals. These complications appear principally to affect
transfers of jointly owned land.

In the current version,
joint owners must agree how much relief is available to each. This
is the case regardless of whether all the owners are individuals, all
are companies or they comprise a mixture of individuals and
companies. With the separation of the provisions, clause 12(5)
apparently ensures that the whole relief given on the disposal of
land cannot exceed 100% of the value transferred (explanatory notes,
paragraph 50). This provision is mirrored by a new section 587C(3A)
in ICTA. The terms of these provisions are not however entirely
clear and do not state explicitly that the total relief may not
exceed 100% of the value of the transfer.

We suggest that clause
12(5) should instead read as follows:

“If relief is given under section 587B of ICTA (gifts of shares,
securities and real property from companies to charities etc) in
respect of the disposal, the amount of relief available under this
section and under section 587B of ICTA shall not, in total, exceed
the total value of the disposal.”

It is not clear whether
clause 12(7) seeks to make sections 3-5 and 9(2) apply to two or more
individuals who are the joint owners of a qualifying interest in land
or whether it seeks to address the position where joint owners
comprise a mixture of individuals and companies. The explanatory
notes offer no illumination on this issue. Indeed, the wording is
ambiguous and its meaning unclear. We therefore suggest that this
clause should be clarified i.e. that both individuals and companies
are covered where there is a combination of the two.

Clause 13(5) defines
persons to include any individual or any other person. We assume
that this is intended to include companies but fail to see why
“individuals” need to be separated from “other persons”. We
do not consider that this adds clarity or simplicity and suggest that
the distinction should be removed by eliminating sub-clauses (a) and
(b).

Other points

1. Clause 1(5) refers to
   “qualifying interests in land” but does so before this term has
   been defined or indeed before the reader has been informed that
   qualifying interests in land comprise one example of “qualifying
   investments”. We would therefore suggest that clause 1(5) should
   stipulate that section 1 is subject to section 3(7). Clause 3(7)
   would then read “in cases where the qualifying investment
   constitutes a qualifying interest in land, any relief under section
   1 is subject to …”. Indeed, there may well be a case for
   including “qualifying interest in land” in clause 2(2), defining
   it my means of the appropriate cross-reference (see
   cross-referencing above).

2. Clause 3(2) contains the phrase
   “beneficial interest in an interest”, which is likely to be
   opaque to the layman. We accordingly suggest that clauses 3(2) and
   3(3) should be replaced by section 587B(9B) because its meaning is
   clear.
   

3. A number of clauses seem
   incapable of interpretation on a stand alone basis, especially
   clause 6(3). This neither clarifies the term “adjustment” nor
   is the basis for such adjustment. The same could be said of the
   term “relievable amount” in clause 1(4).
   

4. There is a general reference to
   an intent to redefine “connected persons” across the Bill. We
   would welcome clarification as to whether this term is intended to
   include civil partners.
   

5. In clause 5(b) the costs of
   transfer or conveyance are exemplified as stamp duty or stamp duty
   land tax. Since only charities can be transferees of assets, we
   wonder why there is a reference to these taxes, which could surely
   only arise in the rarest of cases.
   

6. Although Paragraph 30 of the
   Explanatory Notes does not make this clear, clause 6(c) actually
   introduces section 49 TCGA 1992 and thereby comports a new element.
   Is this intended?

7. In clause 3(1)(b) a leasehold
   interest in land is qualified as a “term of years” absolute.
   Does this mean that the leasehold interest must endure for a term of
   at least one year or can the term comprise less than one year. We
   assume the latter but should be grateful for clarification.
   

8. Pursuant to clause 15,
   Paragraph 60 of the Explanatory Notes explains that references to
   the British Museum and the Natural History Museum are no longer
   required on the ground that such bodies are charitable by virtue of
   Schedule 2 to the Charities Act 1993. As a matter of law, Schedule
   2 to the Charities Act 1993 does not provide a clear basis for
   stating that such bodies are charities.
   

Beyond the brief

The Working Party recognises that
the purpose of this Project is not to change the law but we
nonetheless feel bound to convey the views of the Charity Law
Association on the following issue.

Chattels and
non-qualifying securities

The Association warmly
recommends the extension of these income tax / corporation tax
reliefs to gifts of chattels and securities, which are, as yet,
non-qualifying. This liberalised concession appears to work well in
the USA, demonstrating that the issue of valuation, apparently the
one impediment the Government has so far identified, is capable of
resolution. It is apprehended that, compared to the relief accorded
to gifts of land, similar relief accorded to disposals of assets of
this nature is likely to be far more valuable to charities generally.

Bircham Dyson Bell

22 September 2005