Income Tax (Trading and Other Income) Bill

House of Commons

Session 2004 - 05
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Income Tax (Trading and Other Income) Bill

Income Tax (Trading and Other Income) Bill
Part 5 — Miscellaneous income
Chapter 5 — Settlements: amounts treated as income of settlor
278

639
Loans to participators in close companies
(1)
This section applies if any amount has been included in a person's income
under Chapter 6 of Part 4 (release of loan to participator in close company) in
respect of any loan or advance.
(2)
There is a corresponding reduction in the amount (if any) afterwards falling to
5
be so included under section 633 in respect of the loan or advance.
640
Grossing-up of deemed income
(1)
The whole or any part of a capital sum which is treated under section 633 as
income of the settlor for any tax year is treated as income of an amount equal
to the sum or the part of the sum, grossed up by reference to the rate applicable
10
to trusts for that year.
(2)
The deductible amount is to be set off against the amount of tax charged on any
amount treated under section 633 as income of the settlor for any year.
(3)
In subsection (2) the “deductible amount” is an amount equal to—
(a)
tax at the rate applicable to trusts for the year on the amount treated
15
under section 633 as the settlor’s income,
(b)
so much of the amount of tax at that rate as is equal to the tax charged,
or
(c)
the amount of tax paid by the trustees on the grossed-up amount of so
much of the amount of income available up to the end of the year, in
20
relation to the capital sum, as is taken into account under section 633 in
relation to that sum in that year (see subsections (4) to (7) below),

whichever is the least.
(4)
For the purposes of subsection (3)(c)—
(a)
any reduction falling to be made under section 635(3)(d) is treated as
25
made against income arising under the settlement in an earlier tax year
before income arising under the settlement in a later tax year, and
(b)
income arising under the settlement in an earlier tax year is treated as
taken into account under section 633 before income arising under the
settlement in a later tax year.
30
(5)
For the purposes of subsection (3)(c)—
(a)
the grossed-up amount of any sum is an amount equal to the sum,
grossed up by reference to the appropriate rate for each part of the sum,
and
(b)
the amount of tax paid by the trustees on that grossed-up amount is the
35
difference between the grossed-up amount and the sum in question.
(6)
For the purposes of subsection (5)—
(a)
the appropriate rate for any part of a sum is 0% if—
(i)
the income that falls to be treated in accordance with subsection
(4) as representing that part of the sum is income from a source
40
outside the United Kingdom, and
(ii)
the trustees were non-UK resident for the relevant tax year, and
(b)
the appropriate rate for any part of a sum in relation to which
paragraph (a) does not apply is—
(i)
34%, if the relevant tax year is the year 2003-04 or any earlier tax
45
year, and

Income Tax (Trading and Other Income) Bill
Part 5 — Miscellaneous income
Chapter 5 — Settlements: amounts treated as income of settlor
279

(ii)
40%, if the relevant tax year is the year 2004-05 or any
subsequent tax year.
(7)
In subsection (6) “the relevant tax year”, in relation to any part of a sum, means
the tax year in which the income treated in accordance with subsection (4) as
representing that part of the sum arose under the settlement.
5
Capital sums treated as income of settlor: connected bodies
641
Capital sums paid to settlor by body connected with settlement
(1)
This section applies if—
(a)
a capital sum is paid to the settlor in a tax year by any body corporate
connected with the settlement in that year, and
10
(b)
an associated payment has been, or is, made directly or indirectly to the
body by the trustees of the settlement.
(2)
The capital sum is, in accordance with this section, treated for the purposes of
section 633 as having been paid to the settlor by the trustees of the settlement.
(3)
A capital sum to which subsection (2) applies is treated as having been paid to
15
the settlor in the tax year in which it is paid so far as the amount of the sum falls
within the total of the associated payment or payments made up to the end of
the year.
(4)
A capital sum to which subsection (2) applies is treated as having been paid to
the settlor in the following year so far as the amount of the sum—
20
(a)
is not treated as paid to the settlor in the year mentioned in subsection
(3), and
(b)
falls within the total of the associated payment or payments made up
to the end of the following year (less what was taken into account under
subsection (3) in relation to the sum in the previous year).
25
(5)
Subsection (4) also applies for each subsequent year.
(6)
In its application to a subsequent year—
(a)
the references to the following year are to the subsequent year,
(b)
the reference to the year mentioned in subsection (3) is to that year and
any other year before the subsequent year, and
30
(c)
the reference to what was taken into account under subsection (3) in
relation to the sum in the previous year is to what was taken into
account under this section in relation to the sum in the previous years.
(7)
See also—
section 642 (exception for certain loans or repayments of loans), and
35
section 643 (interpretation of sections 641 and 642).
642
Exception for certain loans or repayments of loans
(1)
Section 641 does not apply to any sum paid to the settlor by way of loan or
repayment of a loan if conditions A and B are met.
(2)
Condition A is that the whole of the loan is repaid within 12 months of the date
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on which it was made.

Income Tax (Trading and Other Income) Bill
Part 5 — Miscellaneous income
Chapter 5 — Settlements: amounts treated as income of settlor
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(3)
Condition B is that the period for which amounts are outstanding in respect of
relevant loans in any period of 5 years is not more than 12 months.
(4)
In subsection (3) “relevant loans” means loans made—
(a)
to the settlor by the body corporate connected with the settlement or by
any other body corporate so connected, or
5
(b)
by the settlor to the body corporate connected with the settlement or to
any other body corporate so connected.
643
Interpretation of sections 641 and 642
(1)
Any question in section 641 or 642 whether a capital sum has been paid—
(a)
to the settlor by a body corporate, or
10
(b)
to a body corporate by the trustees,

is determined in the same way as any question under section 633 whether a
capital sum has been paid to the settlor by the trustees.
(2)
For the circumstances in which a body corporate is treated for the purposes of
this Chapter as connected with a settlement, see section 637(8).
15
(3)
In section 641 and this section “associated payment”, in relation to any capital
sum paid to the settlor by a body corporate, means—
(a)
any capital sum paid to the body by the trustees of the settlement, and
(b)
any other sum paid, or asset transferred, to the body by the trustees
which is not paid or transferred for full consideration in money or
20
money's worth,

being any sum paid, or asset transferred, in the 5 years ending or beginning
with the date on which the capital sum is paid to the settlor.
(4)
For the purposes of sections 641 and 642 and this section any capital sum paid
by a body corporate, and any associated payment made to a body corporate, at
25
a time when it is (within the meaning of section 416 of ICTA) associated with
another body corporate may be treated as paid by, or made to, the other body
corporate.
Settlements by two or more settlors
644
Application to settlements by two or more settlors
30
(1)
In the case of a settlement where there is more than one settlor, this Chapter has
effect in relation to each settlor as if that settlor were the only settlor.
(2)
This works as follows.
(3)
In this Chapter, in relation to a settlor—
(a)
references to the property comprised in a settlement include only
35
property originating from the settlor, and
(b)
references to income arising under the settlement include only income
originating from the settlor.
(4)
For the purposes of sections 629, 631 and 632 only the following are taken into
account in relation to a child of the settlor—
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(a)
income originating from the settlor, and

Income Tax (Trading and Other Income) Bill
Part 5 — Miscellaneous income
Chapter 5 — Settlements: amounts treated as income of settlor
281

(b)
in a case in which section 631 applies, payments which under that
section (as adapted by subsection (5) below) are treated as payments of
income.
(5)
In applying section 631 to a settlor—
(a)
the reference to income arising under the settlement includes only
5
income originating from the settlor, and
(b)
the reference to any payment made in connection with the settlement
includes only a payment made out of property originating from the
settlor or income originating from the settlor.
(6)
See section 645 for the meaning of references in this section to property or
10
income originating from a settlor.
645
Property or income originating from settlor
(1)
References in section 644 to property originating from a settlor are references
to—
(a)
property which the settlor has provided directly or indirectly for the
15
purposes of the settlement,
(b)
property representing property so provided, and
(c)
so much of any property which represents both property so provided
and other property as, on a just and reasonable apportionment,
represents the property so provided.
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(2)
References in section 644 to income originating from a settlor are references
to—
(a)
income from property originating from the settlor, and
(b)
income provided directly or indirectly by the settlor.
(3)
In this section references to property or income which a settlor has provided
25
directly or indirectly—
(a)
include references to property or income which has been provided
directly or indirectly by another person under reciprocal arrangements
with the settlor, but
(b)
do not include references to property or income which the settlor has
30
provided directly or indirectly under reciprocal arrangements with
another person.
(4)
In this section references to property which represents other property include
references to property which represents accumulated income from the other
property.
35
Other supplementary provisions
646
Adjustments between settlor and trustees etc.
(1)
A settlor is entitled to recover from—
(a)
any trustee, or
(b)
any other person to whom the income is payable in connection with the
40
settlement,

the amount of any tax paid by the settlor which became chargeable on the
settlor under section 624 or 629.

Income Tax (Trading and Other Income) Bill
Part 5 — Miscellaneous income
Chapter 5 — Settlements: amounts treated as income of settlor
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(2)
For this purpose, the settlor may require the Inland Revenue to provide the
settlor with a certificate specifying—
(a)
the amount of income in respect of which the settlor has so paid tax, and
(b)
the amount of tax so paid.
(3)
A certificate provided under subsection (2) is conclusive evidence of the facts
5
stated in it.
(4)
Subsection (5) applies if—
(a)
a settlor obtains a repayment of tax in respect of an allowance or relief,
and
(b)
the repayment is in excess of the amount of the repayment to which the
10
settlor would have been entitled but for sections 624 to 632.
(5)
The settlor must pay an amount equal to the excess to—
(a)
the trustee, or
(b)
the other person to whom the income is payable by virtue of or as a
result of the settlement.
15
(6)
If there are two or more such persons, the amount must be apportioned among
them as the case may require.
(7)
Any question as to—
(a)
the amount of a payment under subsection (5), or
(b)
an apportionment to be made under subsection (6),
20

is to be decided by the General Commissioners whose decision is final.
(8)
Nothing in sections 624 to 632 is to be read as excluding a charge to tax on the
trustees as persons by whom any income is received.
647
Power to obtain information
(1)
The Inland Revenue may by notice require any party to a settlement to provide
25
them, within such period as they may direct, with such particulars as they
consider necessary for the purposes of this Chapter.
(2)
The period concerned must be not less than 28 days.
648
Income arising under a settlement
(1)
References in this Chapter to income arising under a settlement include—
30
(a)
any income chargeable to income tax by deduction or otherwise, and
(b)
any income which would have been so chargeable if it had been
received in the United Kingdom by a person domiciled, resident and
ordinarily resident there.
(2)
But this is subject to the rule in subsection (3) which applies if, in a tax year, the
35
settlor is—
(a)
not domiciled in the United Kingdom,
(b)
not UK resident, or
(c)
not ordinarily UK resident.
(3)
The rule is that references in this Chapter to income arising under a settlement
40
do not include income arising under the settlement in that tax year in respect
of which the settlor, if the settlor were actually entitled to it, would not be

Income Tax (Trading and Other Income) Bill
Part 5 — Miscellaneous income
Chapter 6 — Beneficiaries’ income from estates in administration
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chargeable to income tax by deduction or otherwise because of the settlor not
being domiciled in the United Kingdom, UK resident or ordinarily UK
resident.
(4)
Subsection (5) qualifies the rule in subsection (3) if such income is remitted to
the United Kingdom in circumstances such that, if the settlor were actually
5
entitled to the income when remitted, the settlor would be chargeable to
income tax because of being UK resident.
(5)
The income is treated for the purposes of this Chapter as arising under the
settlement in the year in which it is remitted.
Chapter 6
10
Beneficiaries’ income from estates in administration
Charge to tax on estate income
649
Charge to tax on estate income
(1)
Income tax is charged on estate income.
(2)
In this Chapter—
15
“estate income” means the income treated under this Chapter as arising
from an absolute, limited or discretionary interest in the whole or part
of the residue of an estate, and
“estate” means the estate of a deceased person (whether a UK estate or a
foreign estate).
20
(3)
Estate income is treated as income for income tax purposes.
(4)
If different parts of an estate are subject to different residuary dispositions,
those parts are treated for the purposes of this Chapter as if they were separate
estates.
650
Absolute, limited and discretionary interests
25
(1)
A person has an absolute interest in the whole or part of the residue of an estate
for the purposes of this Chapter if—
(a)
the capital of the residue or that part is properly payable to the person,
or
(b)
it would be so payable, if the residue had been ascertained.
30
(2)
A person has a limited interest in the whole or part of the residue of an estate
during any period for the purposes of this Chapter if—
(a)
the person does not have an absolute interest in it, and
(b)
the income from it would be properly payable to the person if the
residue had been ascertained at the beginning of that period.
35
(3)
A person has a discretionary interest in the whole or part of the residue of an
estate for the purposes of this Chapter if—
(a)
a discretion may be exercised in the person’s favour, and
(b)
on its exercise in the person’s favour any of the income of the residue
during the whole or part of the administration period (see section 653)
40

Income Tax (Trading and Other Income) Bill
Part 5 — Miscellaneous income
Chapter 6 — Beneficiaries’ income from estates in administration
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would be properly payable to the person if the residue had been
ascertained at the beginning of that period.
(4)
For the purposes of this section, an amount is only treated as properly payable
to a person if it is properly payable to the person, or to another in the person’s
right, for the person’s benefit, except where subsection (5) applies.
5
(5)
The personal representatives of a deceased person (“A”) are to be treated as
having an absolute or limited interest in the whole or part of the residue of the
estate of another deceased person (“B”) if—
(a)
they have a right in their capacity as A’s personal representatives, and
(b)
were the right vested in them for their own benefit, they would have
10
that interest in B’s estate.
(6)
For the purposes of subsection (4), it does not matter whether the amount is
payable directly by the personal representatives or through a trustee or other
person.
651
Meaning of “UK estate” and “foreign estate”
15
(1)
In this Chapter—
“UK estate”, in relation to a tax year, means an estate which meets
conditions A and B, or condition C, for that year, and
“foreign estate”, in relation to a tax year, means an estate which is not a
UK estate in relation to that year.
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(2)
Condition A is that all the income of the estate either—
(a)
has borne United Kingdom income tax by deduction, or
(b)
is income in respect of which the personal representatives are directly
assessable to United Kingdom income tax for the tax year.
(3)
Condition B is that none of the income of the estate is income for which the
25
personal representatives are not liable to United Kingdom income tax for the
tax year because they are not UK resident or not ordinarily UK resident.
(4)
For the purposes of conditions A and B sums within section 680(3) or (4) (sums
treated as bearing tax) are ignored.
(5)
Condition C is that the aggregate income of the estate for the tax year consists
30
only of sums within section 680(3) or (4).
Types of estate income
652
Estate income: absolute interests in residue
(1)
Income is treated as arising in a tax year from a person’s absolute interest in the
whole or part of the residue of an estate if—
35
(a)
the person has an assumed income entitlement for the tax year in
respect of the interest (see sections 665 to 670), and
(b)
condition A or B is met.
(2)
Condition A is that a payment is made in respect of the interest in the tax year
and before the end of the administration period (see section 653).
40
(3)
Condition B is that the tax year is the final tax year (see section 653).