Budget Notes

BN27 UNCLAIMED ASSETS SCHEME: TAX CHANGES

Who is likely to be affected?

1. Banks and Building Societies, and customers whose accounts are 'dormant' (where the customer has not made contact for 15 years, except in certain circumstances).

General description of the measure

2. This measure makes tax changes to facilitate the Unclaimed Assets Scheme (the "Scheme"), being introduced by the Dormant Bank and Building Societies Accounts Bill.

3. Legislation will be introduced in Finance Bill 2008 to make some legislative changes and introduce powers to make secondary legislative changes that together will ensure that the operation of the Scheme is tax neutral and does not increase the tax administrative burden for the financial institutions.

Operative date

4. The power to introduce secondary legislation will have effect on and after the date that Finance Bill 2008 receives Royal Assent. The capital gains tax changes in Finance Bill (set out in paragraph 8 below) will have effect on and after a date to be appointed by Treasury order, which will be the same date as when the Scheme comes into effect. The tax changes made by secondary legislation will also have effect on and after the date that the Scheme comes into effect.

Current law and proposed revisions

5. Section 851 of the Income Tax Act 2007 requires banks or building societies to deduct income tax at 20 per cent when a payment of interest on deposits is made. This measure will introduce a power to make a secondary legislative change to ensure that the obligation to deduct tax in respect of interest on dormant account balances within the ambit of the Scheme only has effect if, and when, a customer reclaims their dormant account balance.

6. Section 17 of the Taxes Management Act 1970 requires banks and building societies to make a return to HM Revenue and Customs of all interest paid or credited on customers' accounts in each tax year. This measure will introduce a power to make secondary legislative changes to ensure that this requirement in respect of interest on dormant account balances within the ambit of the Scheme only has effect if, and when, a customer reclaims their dormant account balance and the interest on it.

7. Section 370 of the Income Tax (Trading and Other Income) Act 2005 charges non-corporate recipients to income tax on the full amount of interest arising in the tax year. This measure will introduce a power to make secondary legislative changes to ensure that a customer only has an income tax liability in respect of interest arising on their dormant account balances within the ambit of the Scheme if, and when, they reclaim their deposit.

8. Disposals of certain types of bank and building society accounts can give rise to capital gains liability for the account holder. This measure will introduce a primary legislative change to the Taxation of Chargeable Gains Act 1992 to ensure that where dormant accounts within the ambit of the Scheme are transferred to the body that will administer them under the Scheme there will not be a disposal for capital gains tax purposes. A disposal will only occur if, and when, the customer makes a reclaim of such deposits.

Further advice

9. If you have any questions about this change, please contact Aidan Reilly on 020 7147 2575 (email: aidan.reilly@hmrc.gsi.gov.uk). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk