Finance (No. 2) Bill

House of Commons

Session 2004 - 05
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Finance (No. 2) Bill

Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 4 — Trusts with vulnerable beneficiary
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Capital gains tax
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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
5
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
10
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 31 (vulnerable person UK resident during the tax year), or
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(b)
section 32 (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 31 and 32 whether a vulnerable
person is UK resident or non-UK resident during a tax year is to be determined
in accordance with section 41(2).
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31
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.

Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 4 — Trusts with vulnerable beneficiary
24

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Non-UK resident vulnerable persons: amount of relief
(1)
Special capital gains tax treatment applies for the tax year in accordance with
this section if the vulnerable person is non-UK resident during the tax year.
(2)
The trustees’ liability to capital gains tax for the tax year is to be reduced by an
amount equal to—
5

where—
TQTG is the amount of capital gains tax to which the trustees would
(apart from this Chapter) be liable for the tax year in respect of the
qualifying trusts gains, and
VQTG is an amount determined in accordance with section 33 (extra tax
10
to which vulnerable person would be liable for the tax year if
chargeable gains were treated as accruing to him under section 77(1) of
TCGA 1992 by virtue of section 31 above).
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Vulnerable person’s liability: VQTG
(1)
For the purposes of section 32, VQTG is an amount equal to—
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where—
TLVB is an amount determined in accordance with subsection (2) (total
tax liability of vulnerable person), and
TLVA is an amount determined in accordance with subsection (3) (what
total tax liability of vulnerable person would be if it included tax in
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respect of notional section 77 gains).
(2)
TLVB is the total amount of income tax and capital gains tax to which the
vulnerable person would be liable for the tax year—
(a)
if his income for the tax year were equal to the sum of his actual income
for the tax year (if any) and the amount of the trustees’ specially taxed
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income (if any) for the tax year, and
(b)
if his taxable amount for the tax year for the purposes of section 3 of
TCGA 1992 were equal to his deemed CGT taxable amount for the tax
year (if any).
(3)
TLVA is what TLVB would be if the vulnerable person’s taxable amount for the
30
tax year for the purposes of section 3 of TCGA 1992 were equal to the sum of
the amount mentioned in subsection (2)(b) and his notional section 77 gains for
the tax year.
(4)
For the purposes of this section—
(a)
the vulnerable person’s actual income for the tax year,
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(b)
the trustees’ specially taxed income for the tax year,
(c)
the vulnerable person’s deemed CGT taxable amount for the tax year,
and
(d)
the vulnerable person’s notional section 77 gains for the tax year,

are to be determined in accordance with Schedule 1.
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Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 4 — Trusts with vulnerable beneficiary
25

Qualifying trusts
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Disabled persons
(1)
For the purposes of this Chapter where property is held on trusts for the benefit
of a disabled person those trusts are qualifying trusts if they secure that the
conditions in subsection (2) are met—
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(a)
during the lifetime of the disabled person, or
(b)
until the termination of the trusts (if that occurs before his death).
(2)
Those conditions are—
(a)
that if any of the property is applied for the benefit of a beneficiary, it is
applied for the benefit of the disabled person, and
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(b)
either that the disabled person is entitled to all the income (if there is
any) arising from any of the property or that no such income may be
applied for the benefit of any other person.
(3)
The trusts on which property is held are not to be treated as failing to secure
that the conditions in subsection (2) are met by reason only of the powers
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conferred on the trustees by—
(a)
section 32 of the Trustee Act 1925 (c. 19) (powers of advancement), or
(b)
section 33 of the Trustee Act (Northern Ireland) 1958 (c. 23 (N.I.))
(corresponding provision for Northern Ireland).
(4)
The reference in subsection (1) to the lifetime of the disabled person is, where
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property is held for his benefit on trusts of the kind described in section 33 of
the Trustee Act 1925 (protective trusts), to be construed as a reference to the
period during which such property is held on trust for him.
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Relevant minors
(1)
For the purposes of this Chapter where property is held on trusts for the benefit
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of a relevant minor those trusts are qualifying trusts if they are—
(a)
statutory trusts for the relevant minor under sections 46 and 47(1) of the
Administration of Estates Act 1925 (c. 23) (succession on intestacy and
statutory trusts in favour of relatives of intestate), or
(b)
trusts to which subsection (2) below applies.
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(2)
This subsection applies to trusts—
(a)
established under the will of a deceased parent of the relevant minor, or
(b)
established under the Criminal Injuries Compensation Scheme,

which secure that the conditions in subsection (3) are met.
(3)
Those conditions are—
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(a)
that the relevant minor will, on attaining the age of 18, become
absolutely entitled to the property, any income arising from it and any
income that has arisen from property held on the trusts for his benefit
and been accumulated before that time,
(b)
that, until that time, for so long as the relevant minor is living, if any of
40
the property is applied for the benefit of a beneficiary, it is applied for
the benefit of the relevant minor, and
(c)
that, until that time, for so long as the relevant minor is living, either—
(i)
the relevant minor is entitled to all the income (if there is any)
arising from any of the property, or
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Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 4 — Trusts with vulnerable beneficiary
26

(ii)
no such income may be applied for the benefit of any other
person.
(4)
Trusts to which subsection (2) applies are not to be treated as failing to secure
that the conditions in subsection (3) are met by reason only of the powers
conferred on the trustees by—
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(a)
section 32 of the Trustee Act 1925 (c. 19) (powers of advancement), or
(b)
section 33 of the Trustee Act (Northern Ireland) 1958 (c. 23 (N.I.))
(corresponding provision for Northern Ireland).
(5)
In this section “the Criminal Injuries Compensation Scheme” means—
(a)
the schemes established by arrangements made under the Criminal
10
Injuries Compensation Act 1995 (c. 53),
(b)
arrangements made by the Secretary of State for compensation for
criminal injuries in operation before the commencement of those
schemes, or
(c)
the scheme established under the Criminal Injuries (Northern Ireland)
15
Order 2002 (S.I. 2002/796 (N.I. 1)).
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Parts of assets
For the purposes of this Chapter references to property being held on trusts
include references to a part of an asset being held on trusts if—
(a)
that part of the asset, and
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(b)
any income arising from it (or treated as arising from it),
can be identified for the purpose of determining whether the trusts on which it
is held are qualifying trusts.
Vulnerable persons
37
Vulnerable person election
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(1)
Where trustees hold property on trusts for the benefit of a person, the trustees
and that person may jointly make a vulnerable person election in relation to
those trusts and that person if—
(a)
the person in relation to whom the election is made is a vulnerable
person, and
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(b)
the trusts in relation to which the election is made are qualifying trusts.
(2)
A vulnerable person election is an election in such form as the Board of Inland
Revenue may require—
(a)
specifying the date from which it is to have effect (“the effective date”),
(b)
made by notice to the Inland Revenue no later than 12 months after 31st
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January next following the tax year in which the effective date falls, or
within such further time, if any, as the Board of Inland Revenue may by
notice have allowed, and
(c)
containing the items specified in subsection (3).
(3)
Those items are—
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(a)
such information as the Board of Inland Revenue may require,
including in particular information relating to the trusts, the trustees,
the vulnerable person and his entitlement under the trusts and any
other person connected with the trusts,

Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 4 — Trusts with vulnerable beneficiary
27

(b)
a statement that the trusts in relation to which the election is made are
qualifying trusts,
(c)
a declaration that all the information contained in the election is correct
to the best of the knowledge and belief of the trustees and vulnerable
person,
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(d)
a declaration by the vulnerable person that he authorises the trustees to
make any claim under this Chapter for any tax year as they consider
appropriate, and
(e)
such other declarations as the Board of Inland Revenue may reasonably
require.
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(4)
A vulnerable person election is irrevocable.
(5)
A vulnerable person election has effect from the effective date until one of the
following events occurs—
(a)
the person in relation to whom the election is made ceases to be a
vulnerable person,
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(b)
the trusts in relation to which the election is made cease to be qualifying
trusts, and
(c)
the trusts are terminated.
(6)
If the trustees become aware that an event mentioned in subsection (5) has
occurred—
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(a)
they must inform the Inland Revenue that the vulnerable person
election has ceased to have effect, and
(b)
they must do so by giving notice containing particulars of the event
within the period of 90 days beginning on the date on which they first
become aware that the event has occurred.
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Meaning of “disabled person”
(1)
In this Chapter “disabled person” means—
(a)
a person who by reason of mental disorder within the meaning of the
Mental Health Act 1983 (c. 20) is incapable of administering his
property or managing his affairs, or
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(b)
a person in receipt of attendance allowance or of a disability living
allowance by virtue of entitlement to the care component at the highest
or middle rate.
(2)
A person is to be treated as a disabled person under subsection (1)(b) if he
satisfies the Inland Revenue—
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(a)
that if he were to meet the prescribed conditions as to residence under
section 64(1) of SSCBA 1992 or section 64(1) of SSCB(NI)A 1992 he
would be entitled to receive attendance allowance, or
(b)
that if he were to meet the prescribed conditions as to residence under
section 71(6) of SSCBA 1992 or section 71(6) of SSCB(NI)A 1992 he
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would be entitled to receive a disability living allowance by virtue of
entitlement to the care component at the highest or middle rate.
(3)
A person who is (or is treated as) a disabled person under subsection (1)(b) is
not to cease to be (or to be treated as) such a disabled person by reason only of
provision made by—
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(a)
regulations under section 67(1) or (2) of SSCBA 1992 or section 67(1) or
(2) of SSCB(NI)A 1992 (non-satisfaction of conditions for attendance

Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 4 — Trusts with vulnerable beneficiary
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allowance where person is undergoing treatment for renal failure in a
hospital or is provided with certain accommodation), or
(b)
regulations under section 72(8) of SSCBA or section 72(8) SSCB(NI)A
1992 (no payment of disability allowance for persons for whom certain
accommodation is provided).
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(4)
In this section “attendance allowance” means an allowance under—
(a)
section 64 of SSCBA 1992, or
(b)
section 64 of SSCB(NI)A 1992.
(5)
In this section “disability living allowance” means a disability living allowance
under—
10
(a)
section 71 of SSCBA 1992, or
(b)
section 71 of SSCB(NI)A 1992.
(6)
In this section—
“SSCBA 1992” means the Social Security Contributions and Benefits Act
1992 (c. 4), and
15
“SSCB(NI)A 1992” means the Social Security Contributions and Benefits
(Northern Ireland) Act 1992 (c. 7).
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Meaning of “relevant minor”
For the purposes of this Chapter a person is a “relevant minor” if—
(a)
he has not yet attained the age of 18, and
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(b)
at least one of his parents has died.
Miscellaneous and supplementary
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Power to make enquiries
(1)
Where a vulnerable person election has been made the Inland Revenue may by
notice require the trustees or the vulnerable person by whom the election was
25
made to furnish them with such particulars as they may reasonably require for
the purposes of determining—
(a)
whether the requirements mentioned in subsection (1)(a) and (b) of
section 37 were met at the time the election was made, and
(b)
whether an event mentioned in subsection (5) of that section has
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occurred since the effective date.
(2)
The notice must specify the time within which the information must be
furnished (not being less than 60 days).
(3)
If the Board of Inland Revenue determine—
(a)
that either or both of the requirements mentioned in subsection (1)(a)
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and (b) of section 37 were not met at the time the election was made, or
(b)
that an event mentioned in subsection (5) of that section has occurred
since the effective date of the election,

they may give notice to the trustees and the person in relation to whom the
vulnerable person election was made that the election never had effect or
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ceased to have effect from a date specified in the notice.
(4)
A person aggrieved by a determination of the Board of Inland Revenue under
subsection (3) may by notice appeal to the General Commissioners.

Finance (No. 2) Bill
Part 2 — Income tax, corporation tax and capital gains tax
Chapter 4 — Trusts with vulnerable beneficiary
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(5)
The notice of appeal must be given to the Board of Inland Revenue within 30
days after the notice of the determination was given under subsection (3).
(6)
All such adjustments shall be made, whether by discharge or repayment of tax,
the making of assessments or otherwise, as are required to give effect to a
determination under subsection (3) (despite any limitation on the time within
5
which any adjustment may be made).
(7)
In subsection (6) “tax” means income tax or capital gains tax.
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Interpretation etc.
(1)
In this Chapter—
“the Board of Inland Revenue” means the Commissioners of Inland
10
Revenue (as to which, see in particular the Inland Revenue Regulation
Act 1890 (c. 21)),
“the Inland Revenue” means any officer of the Board of Inland Revenue,
“notice” means notice in writing, and
“tax year”—
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(a)
in relation to income tax, means a year of assessment within the
meaning of ICTA (see section 832(1) of that Act), and
(b)
in relation to capital gains tax, means a year of assessment
within the meaning of TCGA 1992 (see section 288(1) of that
Act).
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(2)
For the purposes of this Chapter—
(a)
a vulnerable person is UK resident during a tax year if he is either
resident in the United Kingdom during any part of the tax year or
ordinarily resident in the United Kingdom during the tax year, and
(b)
a vulnerable person is non-UK resident during a tax year if he is neither
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resident in the United Kingdom during any part of the tax year nor
ordinarily resident in the United Kingdom during the tax year.
(3)
Sections 30 to 33 and Schedule 1 are to be construed as one with TCGA 1992.
(4)
To the extent that any provision of this Chapter would not, apart from this
subsection, form part of Income Tax Acts, the provisions of the Income Tax
30
Acts are to apply for the purposes of any references in the provision relating to
income arising (or treated as arising) to a person or to the income tax liability
of a person.
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Application in relation to Scotland
(1)
This Chapter applies in relation to Scotland with the following modifications.
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(2)
In section 23(5), for “trusts on which property is held for the benefit of a
vulnerable person are qualifying trusts” substitute “property held in trust for
the benefit of a vulnerable person is held in qualifying trust”.
(3)
In section 31(3)(a), for “on the qualifying trusts” substitute “in qualifying trust
(in the same trust as the settled property disposed of)”.
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(4)
In section 34—
(a)
in subsection (1), for “those trusts are qualifying trusts if they”
substitute “the property is held in qualifying trust if the trust
purposes”, and