Finance Bill

House of Commons

Session 2004 - 05
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Finance Bill

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 5 — Trusts with vulnerable beneficiary
35

Chapter 5
Trusts with vulnerable beneficiary
Introductory
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Introduction
(1)
This Chapter contains tax provision in connection with—
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(a)
income arising to trustees from property held on qualifying trusts for
the benefit of a vulnerable person, and
(b)
chargeable gains accruing to trustees from the disposal of such
property.
(2)
Section 40 contains provision as to the making of claims for special tax
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treatment under this Chapter.
(3)
Sections 41 to 45 contain provision relating to income tax.
(4)
Sections 46 to 49 contain provision relating to capital gains tax.
(5)
Sections 50 to 52 apply for the purpose of determining whether trusts on which
property is held for the benefit of a vulnerable person are qualifying trusts.
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(6)
In this Chapter “vulnerable person election” means an election under section
53.
(7)
In this Chapter “vulnerable person” means—
(a)
a disabled person (see section 54), or
(b)
a relevant minor (see section 55).
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40
Entitlement to make claim for special tax treatment
A claim for special tax treatment under this Chapter for a tax year may be made
by trustees if—
(a)
in the tax year they hold property on qualifying trusts for the benefit of
a vulnerable person, and
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(b)
a vulnerable person election has effect for all or part of the tax year in
relation to those trusts and that person.
Income tax
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Qualifying trusts income: special income tax treatment
(1)
This section has effect in relation to a tax year if—
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(a)
in the tax year income arises (or is treated as arising) to trustees from
property held on qualifying trusts for the benefit of a vulnerable person
(“qualifying trusts income”), and
(b)
a claim for special tax treatment under this Chapter for the tax year is
made by the trustees.
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(2)
Special income tax treatment applies for the tax year in accordance with
sections 42 to 45.

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 5 — Trusts with vulnerable beneficiary
36

(3)
But this section does not have effect in relation to the tax year if the property
from which the qualifying trusts income arises (or is treated as arising) is
property in which a person who is a settlor (within the meaning given by
section 660G(1) and (2) of ICTA) is regarded as having an interest for the
purposes of section 660A of that Act (income arising under settlement where
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settlor retains an interest).
42
Amount of relief
The trustees’ liability to income tax for the tax year is to be reduced by an
amount equal to—
where—
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TQTI is an amount determined in accordance with section 43 (income tax
liability of trustees in respect of qualifying trusts income), and
VQTI is an amount determined in accordance with section 44 (extra tax to
which vulnerable person would be liable if qualifying trusts income
were income of his).
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43
Trustees’ liability: TQTI
(1)
For the purposes of section 42, TQTI is the amount of income tax to which the
trustees would (apart from this Chapter) be liable for the tax year in respect of
the qualifying trusts income arising (or treated as arising) to them in that year
(or to which they would be so liable if their liability were computed in
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accordance with subsection (2) in a case to which that subsection applies).
(2)
In a case where—
(a)
income arising (or treated as arising) to the trustees in the tax year
(“total income”) includes income (“other income”) which is not
qualifying trusts income, and
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(b)
the trustees have any expenses in the tax year (“the management
expenses”) which are properly chargeable to total income or would be
so chargeable but for any express provisions of the trusts,

there shall be disregarded, in computing the income tax liability of the trustees
for the tax year in respect of the qualifying trusts income arising (or treated as
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arising) to them in that year, such part of the management expenses as bears
the same proportion to all those expenses as other income bears to total income.
(3)
This section is subject to section 45 (vulnerable person election having effect for
only part of tax year).
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Vulnerable person’s liability: VQTI
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(1)
For the purposes of section 42, VQTI is an amount equal to—
where—
TLV2 is an amount determined in accordance with subsection (2) (and
subsection (4) where it applies) (total tax liability of vulnerable person),
and
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TLV1 is an amount determined in accordance with subsection (3) (and
subsection (4) where it applies) (what total tax liability of vulnerable
person would be if his income included qualifying trusts income).

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 5 — Trusts with vulnerable beneficiary
37

(2)
TLV2 is the total amount of income tax and capital gains tax to which the
vulnerable person would be liable for the tax year if his income tax liability
were computed in accordance with subsections (5) and (6).
(3)
TLV1 is what TLV2 would be if the qualifying trusts income arising (or treated
as arising) to the trustees in the tax year in respect of which the trustees are
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liable to income tax were income of the vulnerable person for the tax year.
(4)
Where the vulnerable person is non-UK resident during the tax year—
(a)
his income tax liability for the purposes of determining TLV1 and TLV2
is to be computed in accordance with the Income Tax Acts on the
assumption that he is resident and domiciled in the United Kingdom
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throughout the tax year, and
(b)
his capital gains tax liability for the purposes of determining TLV1 and
TLV2 is to be computed on the assumption that his taxable amount for
the purposes of section 3 of TCGA 1992 is equal to his deemed CGT
taxable amount.
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(5)
For the purposes of this section, in a case where income which has arisen to the
trustees (whenever it arose) is distributed to the vulnerable person in the tax
year, that income is to be disregarded in computing income tax to which he
would be liable for the tax year for the purposes of determining TLV1 and
TLV2.
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(6)
For the purposes of this section, in computing income tax to which the
vulnerable person would be liable for the tax year for the purposes of
determining TLV1 and TLV2, there is to be disregarded any relief which is
given by way of a reduction in the amount of income tax to which the
vulnerable person would be liable apart from that relief.
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(7)
For the purposes of this section—
(a)
whether or not a vulnerable person is non-UK resident is to be
determined in accordance with section 57(2), and
(b)
a non-UK resident vulnerable person’s deemed CGT taxable amount is
to be determined in accordance with paragraph 3 of Schedule 3.
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(8)
This section is subject to section 45 (vulnerable person election having effect for
only part of tax year).
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Part years
(1)
Where the vulnerable person election has effect for only part of the tax year
(“the elected part of the tax year”) sections 42, 43 and 44 apply with the
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modifications in subsection (2).
(2)
Those modifications are—
(a)
that references to the qualifying trusts income arising (or treated as
arising) to the trustees in the tax year are to be treated as references to
the qualifying trusts income arising (or treated as arising) to them in the
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elected part of the tax year, and
(b)
that the references in section 43(2) to income arising (or treated as
arising) to the trustees in the tax year and expenses of the trustees in the
tax year are to be treated as (respectively) references to income arising
(or treated as arising) to the trustees in the elected part of the tax year
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and expenses of the trustees in that part of the tax year.

Finance Bill
Part 3 — Income tax, corporation tax and capital gains tax
Chapter 5 — Trusts with vulnerable beneficiary
38

Capital gains tax
46
Qualifying trusts gains: special capital gains tax treatment
(1)
This section has effect in relation to a tax year if—
(a)
in the tax year chargeable gains accrue to the trustees of a settlement
from the disposal of settled property which is held on qualifying trusts
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for the benefit of a vulnerable person (“the qualifying trusts gains”),
(b)
the trustees would (apart from this Chapter) be chargeable to capital
gains tax in respect of those gains,
(c)
the trustees are either resident in the United Kingdom during any part
of the tax year or ordinarily resident in the United Kingdom during the
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tax year, and
(d)
a claim for special tax treatment under this Chapter for the tax year is
made by the trustees.
(2)
Special capital gains tax treatment applies for the tax year in accordance with—
(a)
section 47 (vulnerable person UK resident during the tax year), or
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(b)
section 48 (vulnerable person non-UK resident during the tax year).
(3)
But this section does not have effect in relation to the tax year if the vulnerable
person dies during that year.
(4)
The reference in subsection (1)(a) to chargeable gains accruing to the trustees
from the disposal of settled property includes a reference to chargeable gains
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treated as accruing to them under section 13 of TCGA 1992 (attribution of gains
to members of non-resident companies).
(5)
For the purposes of this section and sections 47 and 48 whether a vulnerable
person is UK resident or non-UK resident during a tax year is to be determined
in accordance with section 57(2).
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UK resident vulnerable persons: section 77 treatment
(1)
Special capital gains tax treatment applies for the tax year in accordance with
this section if the vulnerable person is UK resident during the tax year.
(2)
Section 77(1) (and section 78 and section 79, apart from subsection (6)) of TCGA
1992 are to be treated as applying in relation to the qualifying trusts gains as
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if—
(a)
the vulnerable person were a settlor in relation to the settlement,
(b)
the settled property disposed of, and any other settled property
disposed of (whenever so disposed) at a time when it was relevant
settled property, originated from him, and
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(c)
he had an interest in the settlement during the tax year.
(3)
For the purposes of subsection (2)(b), property is “relevant settled property” at
any time when—
(a)
it is property held on the qualifying trusts for the benefit of the
vulnerable person, and
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(b)
the trustees would (apart from this Chapter) be chargeable to capital
gains tax in respect of any chargeable gains accruing to them on a
disposal of it.