Finance (No. 2) Bill

House of Commons

Session 2004 - 05
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Other Bills before Parliament

Finance (No. 2) Bill

Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 3 — Employment-related securities
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and expressions used in this section and in Chapter 4A of Part 7 of that Act
have the same meaning in this section as in that Chapter.
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Capital gains
(1)
TCGA 1992 is amended as follows.
(2)
In section 119A(3) (increase in expenditure by reference to tax charged in
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relation to employment-related securities: events giving rise to relevant
income tax charge)—
(a)
after “employment income” insert “in respect of the employment-
related securities”,
(b)
for the word “or” at the end of paragraph (c) substitute—
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“(ca)
under section 447 of ITEPA 2003 (receipt of benefit) in a
case where the benefit is an increase in the market value
of the employment-related securities,”,
(c)
after paragraph (d) insert “or—
(e)
under subsection (3) of section 21 of the Finance Act
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2005 (transitional charge in relation to shares in spin-out
companies) by virtue of subsection (4)(b) of that section
(election by employee).”, and
(d)
omit the words following the paragraphs.
(3)
After section 149AA insert—
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“149AB
Shares in research institution spin-out companies
(1)
Where an individual has acquired shares (or an interest in shares) in
circumstances where section 452(1) and (2)(a) of ITEPA 2003 (shares in
research institution spin-out companies: market value on acquisition)
apply (and section 149AA does not apply in relation to those shares (or
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interest in shares)) the consideration for the acquisition shall (subject to
section 119A) be taken to be equal to the aggregate of—
(a)
the actual amount or value given for the shares (or interest in
shares), and
(b)
any amount that constituted earnings under Chapter 1 of Part 3
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of ITEPA 2003 (earnings) in respect of the acquisition.
(2)
Subsection (1) above applies only to the individual making the
acquisition and, accordingly, is to be disregarded in calculating the
consideration received by the person from whom the shares (or interest
in shares) are (or is) acquired.”
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(4)
The amendment made by paragraph (b) of subsection (2) has effect only in
relation to disposals on or after 6th April 2005; but the other amendments made
by that subsection have effect in relation to any disposal (whether before or
after the passing of this Act).
(5)
The amendment made by subsection (3) has effect in relation to any acquisition
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(whether before or after the passing of this Act).

Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 4 — Trusts with vulnerable beneficiary
20

Chapter 4
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 24 contains provision as to the making of claims for special tax
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treatment under this Chapter.
(3)
Sections 25 to 29 contain provision relating to income tax.
(4)
Sections 30 to 33 contain provision relating to capital gains tax.
(5)
Sections 34 to 36 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
37.
(7)
In this Chapter “vulnerable person” means—
(a)
a disabled person (see section 38), or
(b)
a relevant minor (see section 39).
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24
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 26 to 29.

Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 4 — Trusts with vulnerable beneficiary
21

(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).
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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 27 (income tax
liability of trustees in respect of qualifying trusts income), and
VQTI is an amount determined in accordance with section 28 (extra tax to
which vulnerable person would be liable if qualifying trusts income
were income of his).
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27
Trustees’ liability: TQTI
(1)
For the purposes of section 26, 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 29 (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 26, 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 (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 4 — Trusts with vulnerable beneficiary
22

(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 41(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 1.
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(8)
This section is subject to section 29 (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 26, 27 and 28 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 27(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.