I think the supposed doctrine of relation back is no more than a description of how the law of succession strives to preserve the specific gift in specie so far as is possible alongside the PRs’ right of marshalling i.e. to liquidate any assets to pay debts and testamentary expenses. This is reflected in Sch 1 Part 2 AEA 1925 (Order of Application of Assets where the Estate is Solvent) where a specific gift is number 6 down the order of priority.
Provided it does not have to be sold it becomes apparent at a certain point that the gifted asset and its income has always belonged to the legatee absolutely; but meanwhile that is not the position at all. Those who frame tax legislation seem to have a blind spot when it comes to the AP and its related jurisprudence. Exceptions are the statutory regime for income tax on estate income and s.91 IHTA. The TRS seems to have overlooked its legal consequences altogether.
In Hawley it suited the taxpayer to have the receipts spread, aka top-slicing. It must be borne in mind, especially by those who were not around in the horse-drawn era before Self-Abnegation, that assessment and collection worked differently and in 1925 the Inland Revenue clearly had no difficulty with the then current rules. My point is that the rules we have now are different. When the income is released by the PRs it clearly must be returned. The suggestion that the taxpayer should file serial returns for years 1 through 6, being the putative “arising” years, is at least surprising. Is it even possible? Not online it ain’t.
My suggestion is to return it in the year of receipt to avoid a default. The 4 year time limit, and the shorter period under ss 9A(2) and 29 (5) (a) TMA, then and only run for the taxpayer and against HMRC. So the 6 year and 20 year time limit are not relevant: there is simply no act of carelessness or deliberation etc per s36(1) or (1A) in any tax year prior to the year of receipt. The taxpayer can then argue for backward spreading per Hawley, if advantageous, as officially endorsed in TSEM7940, per the white space or its electronic equivalent.
There are no provisions for “re-opening” prior years, as Malcolm suggests. Compare s169C(9) TCGA, albeit with a 6 year window. Under what provision will HMRC make an assessment in year 7 for year 1, a year when no return was required and so no default has occurred and in relation to which s.29(1)(a) is simply not fulfilled ; “tax ought to have been assessed but has not been assessed”. No tax ought to have been assessed for year 1 and an assessment under s34(1) would be out of time. Limitation periods, whether under the 1980 Act or the CPR or tax statutes, can be arbitrary even capricious and unfair but where plainly applicable they are the law. I doubt that Uncle Rowlatt envisaged that a 2024 version of Mr Hawley would be able to plead limitation as to years no longer in date. If tax is chargeable on a receipts basis there can be no charge, either at the time or later, in respect of a year when nothing was received. A bullet payment of interest on a deposit is taxable for the year of receipt not spread back over the years of accrual.
I believe Hawley was correctly decided on its facts because the share of profits accrued due and was payable year by year save that the payer defaulted and had to pay belatedly lump sums in discharge of its obligations. In the absence of any relieving provision he should have been assessed year by year. Compare SAIM1160 (unremittable foreign income) for such a relieving procedure.
If a specific legatee’s income is taken for admin and he is compensated from the entitlement of a beneficiary higher up in 1-5 of the order under the AEA is the compensation assessable, if so when, and should it be paid net of tax? This may be just too much excitement for a single thread.
Jack Harper