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HMRC internal manual

Business Income Manual

HM Revenue & Customs
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Films and sound recordings: old regime for films: avoidance: individual exit schemes: the exit charge

S797, S803 Income Tax Act 2007

The ‘chargeable event’

A chargeable event occurs when all the conditions at BIM56520 have been met. Often the disposal and exit event are likely to be simultaneous. Providing a claim has already been made, then the charge applies at the time when the disposal and exit event occur.

These rules mean that it is possible for a claim to loss relief to itself be a chargeable event. This is necessary to prevent an individual avoiding the charge by delaying the loss claim until after the exit. This situation may be unlikely as, in such an instance, the individual will probably not make the claim. However, should a claim for loss relief be made and you have reason to believe that an exit event and disposal have already taken place or are planned, you should refer the case to Anti-avoidance Group (Films) before giving effect to the claim.

It is quite possible that there may be more than one, or indeed several, chargeable events in the same or different tax years. There are several ways that this could happen. For example consideration may be received in instalments, there may be several claims or part disposals, or an individual’s capital contribution may be reduced incrementally. It is therefore important to maintain full records of any disposals, loss claims and exit events for affected individuals. It is, of course, the individual’s own responsibility in the first instance to self assess where the exit charge applies.

In most cases, it will be much more beneficial for an individual to remain within a tax deferral scheme and repay the deferred tax over the duration of the scheme rather than incurring an exit charge. Therefore, it is unlikely that the exit charge will be applied in many cases. However, in order to monitor the effectiveness of this charge, Anti-avoidance Group (Films) would like to hear of any cases where the exit charge arises.

The ‘chargeable amount’

The chargeable amount is equal to the sum of:

  1. the amount or value of any non-taxable consideration (see BIM56525) received in a tax year by the individual for the relevant disposal (or disposals), and
  2. the amount by which the sideways loss relief or relief against chargeable gains claimed exceeds the individual’s capital contribution to the trade (see BIM56540).

Any amounts which have already been treated as consideration under (a) cannot be included again in a later chargeable event.

The excess losses in (b) are reduced (but not below nil) by any amount of excess loss that has previously been subject to an exit charge.

Any amount of non-taxable consideration which is included in the chargeable amount cannot also be included in calculating a reduction in an individual’s capital contribution to the trade.

The charge to tax

Income Tax is charged on the individual in the tax in which the chargeable event (or events) takes place.

The individual is deemed to have received an amount of income, equal to the chargeable amount, which is chargeable to Income Tax. The charge is a stand-alone charge so that the income is not treated as profits of the trade.

Death is not an occasion of charge

Death does not lead to a charge to tax under the exit charge. Even though an individual may be said to have lost his right to income at the time of his death, the charge to tax cannot be applied as it can only arise on the individual who has claimed the losses. It cannot be raised on the executors or successors of a deceased person.

However, as with any personal tax liability which comes into existence before death, the executors or successors may be liable for any chargeable amount which arose before the person died.

Examples showing how the exit charge is computed in certain situations are included at BIM56550.