Finance Bill - continued        House of Commons
PART III, INCOME TAX AND CORPORATION TAX - continued
Distributions, tax credits etc: avoidance - continued

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Unauthorised unit trusts.     29. - (1) Where a qualifying distribution-
 
 
    (a) is made on or after 2nd July 1997 but before 6th April 1999 by a company resident in the United Kingdom, and
 
    (b) falls to be regarded by virtue of subsection (2) of section 469 of the Taxes Act 1988 (unit trusts other than authorised unit trusts) as income of the trustees of a unit trust scheme to which that section applies, and
 
    (c) is not a foreign income dividend and does not fall to be regarded by virtue of any provision of the Tax Acts apart from this section as a foreign income dividend arising to the trustees,
  the trustees shall be treated for all purposes of the Tax Acts (apart from this section) as if the qualifying distribution were a foreign income dividend.
 
      (2) Subsection (1) above shall not apply-
 
 
    (a) if the unit trust scheme is a common investment fund established under section 42 of the Administration of Justice Act 1982; or
 
    (b) if, apart from section 469(2) of the Taxes Act 1988, the whole of the qualifying distribution would fall to be regarded as income of section 505 bodies.
      (3) In this section-
 
 
    "foreign income dividend" shall be construed in accordance with Chapter VA of Part VI of the Taxes Act 1988;
 
    "section 505 body" means-
 
      (a) a charity, as defined in section 506(1) of the Taxes Act 1988;
 
      (b) a body mentioned in section 507 of that Act (heritage bodies); or
 
      (c) an Association of a description specified in section 508 of that Act (scientific research organisations).
 
Distributions, tax credits etc in and after 1999-00
Tax credits.     30. - (1) Section 231 of the Taxes Act 1988 (tax credits for certain recipients of qualifying distributions) shall be amended in accordance with subsections (2) to (7) below.
 
      (2) In subsection (1) (recipient of certain distributions to be entitled to tax credit equal to proportion of distribution corresponding to rate of ACT in force)-
 
 
    (a) after "where" there shall be inserted ", in any year of assessment for which income tax is charged,"; and
 
    (b) for "the rate of advance corporation tax in force for the financial year in which" there shall be substituted "the tax credit fraction in force when."
      (3) After subsection (1) there shall be inserted-
 
 
    "(1A) The tax credit fraction is one-ninth."
 
      (4) Subsection (2) (payment of tax credit to company resident in UK) shall cease to have effect.
 
      (5) In subsection (3) (which includes provision for payment of excess of tax credit over income tax liability to person not being a company resident in the UK)-
 
 
    (a) for "Subject to section 231A," there shall be substituted "Subject to subsection (3AA) below,"; and
 
    (b) the words "and subject to subsections (3A) and (3D) below and section 231A where the credit exceeds that income tax, to have the excess paid to him" shall cease to have effect.
      (6) After subsection (3) there shall be inserted-
 
 
    "(3AA) For any year of assessment, the aggregate amount of the tax credits in respect of which claims are made under subsection (3) above by any person must not exceed the aggregate amount of the tax credits in respect of such qualifying distributions (if any) as are brought into charge to tax in the case of that person."
 
      (7) In consequence of subsection (5) above, subsections (3A) to (3D) shall cease to have effect.
 
      (8) Section 231A of the Taxes Act 1988 (which is superseded by the foregoing provisions of this section) shall cease to have effect.
 
      (9) The amendments made by subsections (5) and (6) above do not affect the entitlement of a person who is not resident in the United Kingdom to payment in respect of a tax credit by virtue of arrangements having effect under section 788 of the Taxes Act 1988 (relief by agreement with other countries).
 
      (10) Where-
 
 
    (a) arrangements having effect by virtue of section 788 of the Taxes Act 1988 confer on a person not resident in the United Kingdom the right to a tax credit under section 231 of the Taxes Act 1988 in respect of a dividend of a company resident in the United Kingdom, and
 
    (b) the arrangements contain provision for permitting-
 
      (i) tax to be charged or deducted, or
 
      (ii) a reduction in the amount of the tax credit that is paid to be made,
 
    by reference to the aggregate of the dividend and the tax credit, and
 
    (c) the amount of that tax or that reduction exceeds the amount of the tax credit,
  that provision shall only have the effect of reducing to nil the amount of the payment to which the person is entitled in respect of the tax credit.
 
      (11) This section has effect in relation to distributions made on or after 6th April 1999.
 
Rates of tax applicable to Schedule F income etc.     31. - (1) Section 1A of the Taxes Act 1988 (application of lower rate to income from savings and distributions) shall be amended in accordance with subsections (2) to (4) below.
 
      (2) In subsection (1) (certain savings and distribution income to be charged at the lower rate to the exclusion of basic rate) for "lower rate" there shall be substituted "rate applicable in accordance with subsection (1A) below".
 
      (3) After subsection (1) there shall be inserted-
 
 
    "(1A) The rate applicable in accordance with this subsection is-
 
 
    (a) in the case of income chargeable under Schedule F, the Schedule F ordinary rate;
 
    (b) in the case of equivalent foreign income falling within subsection (3)(b) below and chargeable under Case V of Schedule D, the Schedule F ordinary rate; and
 
    (c) in the case of any other income, the lower rate."
      (4) For subsection (5) (income to which section 1A applies to be treated as the highest part of a person's income) there shall be substituted-
 
 
    "(5) For the purposes of subsection (1)(b) above and any other provisions of the Income Tax Acts-
 
 
    (a) so much of any person's income as comprises income to which this section applies shall be treated as the highest part of his income; and
 
    (b) so much of that part as consists of-
 
      (i) income chargeable under Schedule F (if any), and
 
      (ii) equivalent foreign income falling within subsection (3)(b) above and chargeable under Case V of Schedule D (if any),
 
    shall be treated as the highest part of that part."
      (5) After section 1A of the Taxes Act 1988 there shall be inserted-
 
 
"Rates of tax applicable to Schedule F income etc.     1B. - (1) In the case of so much of an individual's income which consists of-
 
    (a) income chargeable under Schedule F (if any), and
 
    (b) equivalent foreign income falling within section 1A(3)(b) and chargeable under Case V of Schedule D (if any),
  as is income falling within section 1(2)(b), income tax shall, by virtue of this subsection, be charged at the Schedule F upper rate, instead of at the rate otherwise applicable to it in accordance with section 1(2)(b).
 
      (2) In relation to any year of assessment for which income tax is charged-
 
 
    (a) the Schedule F ordinary rate is 10 per cent., and
 
    (b) the Schedule F upper rate is 32.5 per cent.,
  or, in either case, such other rate as Parliament may determine."
 
      (6) This section has effect in relation to distributions made on or after 6th April 1999.
 
Trusts.     32. - (1) Section 686 of the Taxes Act 1988 (income arising to trustees which is to be chargeable at the rate applicable to trusts) shall be amended as follows.
 
      (2) In subsection (1) (income to which the section applies to be chargeable at the rate applicable to trusts instead of at the basic rate or, in accordance with section 1A, the lower rate)-
 
 
    (a) for "at the rate applicable to trusts" there shall be substituted "at the rate applicable in accordance with subsection (1AA) below"; and
 
    (b) after "at the lower rate" there shall be inserted "or the Schedule F ordinary rate".
      (3) After subsection (1) there shall be inserted-
 
 
    "(1AA) The rate applicable in accordance with this subsection is-
 
 
    (a) in the case of so much of any income to which this section applies as is Schedule F type income, the Schedule F trust rate; and
 
    (b) in the case of any other income to which this section applies, the rate applicable to trusts."
      (4) In subsection (1A) (the rate applicable to trusts etc) for the words from the beginning to "Parliament may determine" there shall be substituted-
 
 
    "(1A) In relation to any year of assessment for which income tax is charged-
 
 
    (a) the Schedule F trust rate shall be 25 per cent., and
 
    (b) the rate applicable to trusts shall be 34 per cent.,
  or, in either case, such other rate as Parliament may determine."
 
      (5) In subsection (1A), so as to make the words following "as Parliament may determine" into a separate paragraph, for the words "and, for the purposes of assessments" there shall be substituted-
 
             "For the purposes of assessments".
 
      (6) In subsection (2AA) (income treated by s.689B as applied in defraying trustees' expenses to be taxed at the rate that would apply apart from s.686, instead of the rate applicable to trusts) after "instead of the rate applicable to trusts" there shall be inserted "or the Schedule F trust rate (as the case may be)".
 
      (7) Before subsection (6) there shall be inserted-
 
 
    "(5A) In this section "Schedule F type income", in relation to trustees, means-
 
 
    (a) income chargeable under Schedule F;
 
    (b) income to which section 1A applies by virtue of its being equivalent foreign income falling within subsection (3)(b) of that section and chargeable under Case V of Schedule D;
 
    (c) a qualifying distribution whose amount or value is determined in accordance with section 233(1A);
 
    (d) a non-qualifying distribution, within the meaning of section 233(1B);
 
    (e) income treated as arising to the trustees by virtue of section 249(6)(b);
 
    (f) income treated as received by the trustees by virtue of section 421(1)(a);
 
    (g) any amount which, by virtue of section 686A, is treated for the purposes of the Tax Acts as if it were income to which this section applies."
      (8) For the sidenote there shall be substituted "Accumulation and discretionary trusts: special rates of tax."
 
      (9) After section 686 of the Taxes Act 1988 there shall be inserted-
 
 
"Certain distributions to be treated as income to which section 686 applies.     686A. - (1) This section applies where-
 
    (a) a qualifying distribution is made to trustees;
 
    (b) the trustees are not the trustees of a unit trust scheme; and
 
    (c) the qualifying distribution falls within subsection (2) below.
      (2) A qualifying distribution falls within this subsection if it is a payment made by a company-
 
 
    (a) on the redemption, repayment or purchase of its own shares; or
 
    (b) on the purchase of rights to acquire its own shares.
      (3) The relevant part of the distribution shall be treated for the purposes of the Tax Acts as if it were income to which section 686 applies.
 
      (4) In subsection (3) above the reference to the relevant part of the distribution is a reference to so much (if any) of the distribution as-
 
 
    (a) is not income falling within paragraph (a) of section 686(2);
 
    (b) does not fall to be treated for the purposes of the Income Tax Acts as income of a settlor;
 
    (c) is not income arising under a trust established for charitable purposes; and
 
    (d) is not income from investments, deposits or other property held for any such purposes as are mentioned in sub-paragraph (i) or (ii) of section 686(2)(c).
      (5) Subsection (6) of section 686 shall apply for the purposes of this section as it applies for the purposes of that section."
 
      (10) The amendment made by subsection (5) above has effect on and after 6th April 1999.
 
      (11) The other amendments made by this section have effect in relation to distributions made on or after 6th April 1999.
 
 
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Prepared 24 July 1997