Finance (No.2) Bill

House of Commons

Session 2005 - 06
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Finance (No.2) Bill

Finance (No.2) Bill
Schedule 13 — Settlements: amendments to ICTA and ITTOIA 2005 etc
Part 1 — Principal amendments
327

(3)
Condition 1 is that all the trustees are resident in the United
Kingdom.
(4)
Condition 2 is that—
(a)
at least one trustee is resident in the United Kingdom,
(b)
at least one is not resident in the United Kingdom, and
5
(c)
a settlor in relation to the settlement was resident, ordinarily
resident or domiciled in the United Kingdom at a time which
is a relevant time in relation to him.
(5)
In subsection (4)(c) “relevant time” in relation to a settlor means—
(a)
where the settlement arose on the settlor’s death (whether by
10
will, intestacy or otherwise), the time immediately before his
death, and
(b)
in any other case, a time when the settlor made the settlement
(or was treated for the purposes of the Tax Acts as making the
settlement);
15

and, in the case of a transfer of property from Settlement 1 to
Settlement 2 in relation to which section 685C applies, “relevant
time” in relation to a settlor of the transferred property in respect of
Settlement 2 includes any time which, immediately before the time
of the disposal by the trustees of Settlement 1, was a relevant time in
20
relation to that settlor in respect of Settlement 1.
(6)
A trustee who is not resident in the United Kingdom shall be treated
for the purposes of subsections (3) and (4) as if he were resident in
the United Kingdom at any time when he acts as trustee in the course
of a business which he carries on in the United Kingdom through a
25
branch, agency or permanent establishment there.
(7)
If the deemed person referred to in subsection (1) is not treated for
the purposes of the Tax Acts as resident and ordinarily resident in
the United Kingdom, then for the purposes of the Tax Acts it shall be
treated as neither resident nor ordinarily resident in the United
30
Kingdom.
(8)
If part of the settled property in relation to a settlement is vested in
one trustee or body of trustees and another part of the settled
property in relation to that settlement is vested in another trustee or
body of trustees (and in particular where settled land within the
35
meaning of the Settled Land Act 1925 (c. 18) is vested in the tenant
for life and investments representing capital money are vested in the
trustees of the settlement) they shall together be treated for the
purposes of this section as constituting and, in so far as they act
separately, as acting on behalf of a single body of trustees.
40
(9)
If the trustees of a settlement are carrying on a trade, profession or
vocation, a change in the trustees of the settlement by reason of the
coming into force of this section and section 685A shall not result
in—
(a)
any of the trustees before the change permanently ceasing to
45
carry on the trade, profession or vocation, or
(b)
any of the trustees after the change starting to carry on the
trade, profession or vocation.

Finance (No.2) Bill
Schedule 13 — Settlements: amendments to ICTA and ITTOIA 2005 etc
Part 1 — Principal amendments
328

685F
Application of section 739 and 740
(1)
Section 685E(2) and (7) shall not apply for any of the purposes of
section 739 in relation to income payable before 15th June 1989, or for
the purposes of subsection (3) of that section in relation to income
payable on or after that date if—
5
(a)
the capital sum mentioned in that subsection was received, or
the right to receive it was acquired, before that date, and
(b)
the sum was wholly repaid, or the right to it waived, before
1st October 1989.
(2)
Section 685E shall not apply for any of the purposes of section 740 in
10
relation to benefits received before 15th June 1989; and, in relation to
benefits received on or after that date, “relevant income” includes
income arising to the trustees of a settlement before 6 April 1989,
notwithstanding that one or more trustees was not resident outside
the United Kingdom, unless the trustees have been charged to tax in
15
relation to that income.
685G
Sub-funds
(1)
If the trustees of a settlement have made a sub-fund election under
paragraph 1 of Schedule 4ZA to the 1992 Act, then for the purposes
of the Tax Acts, unless the context otherwise requires—
20
(a)
the sub-fund settlement shall be treated as a settlement,
(b)
the sub-fund settlement shall be treated as having been
created at the time when the sub-fund election is treated as
having taken effect,
(c)
each trustee of the trusts on which the property comprised in
25
the sub-fund settlement is held shall be treated as a trustee of
the sub-fund settlement,
(d)
a person who is a trustee of the sub-fund settlement shall be
treated, from the time when the election is to be treated as
having taken effect, as having ceased to be a trustee of the
30
principal settlement unless he is also a trustee of trusts on
which property comprised in the principal settlement is held,
(e)
a person who is a trustee of the principal settlement shall not
be treated as a trustee of the sub-fund settlement unless he is
also a trustee of trusts on which property comprised in the
35
sub-fund settlement is held, and
(f)
the trustees of the sub-fund settlement shall be treated as
having become absolutely entitled, at the time when the sub-
fund election is treated as having taken effect, to the property
comprised in that settlement as against the trustees of the
40
principal settlement.
(2)
References in subsection (1) to the time when the sub-fund election
is treated as having taken effect are references to the time when the
sub-fund election is treated as having taken effect under paragraph
2 of Schedule 4ZA to the 1992 Act.
45
(3)
In this section—
“principal settlement” has the meaning given by paragraph 1 of
Schedule 4ZA to the 1992 Act,

Finance (No.2) Bill
Schedule 13 — Settlements: amendments to ICTA and ITTOIA 2005 etc
Part 1 — Principal amendments
329

“sub-fund election” has the meaning given by paragraph 2 of
that Schedule, and
“sub-fund settlement” has the meaning given by paragraph 1 of
that Schedule.”
      (2)
Sections 685A to 685C, inserted by sub-paragraph (1), shall come into force
5
on 6th April 2006 (in relation to settlements whenever created).
      (3)
Section 685D, inserted by sub-paragraph (1), shall have effect in respect of
variations occurring on or after 6th April 2006 (irrespective of the date on
which the deceased person died).
      (4)
Section 685E, inserted by sub-paragraph (1), shall have effect—
10
(a)
for the purposes of determining the residence status of the trustees
of a settlement (whenever created), from 6th April 2007, and
(b)
for any other purpose (in relation to settlements whenever created),
from 6th April 2006.
      (5)
Section 685F, inserted by sub-paragraph (1), shall come into force on 6th
15
April 2006.
      (6)
Section 685G, inserted by sub-paragraph (1), shall have effect in relation to
years of assessment beginning on or after 6th April 2006.
2     (1)
In section 686(2)(b) of ICTA—
(a)
omit “either”, and
20
(b)
for sub-paragraphs (i) and (ii) substitute “the income of a person
other than the trustees.”
      (2)
This paragraph shall come into force on 6th April 2006 (in relation to
settlements whenever created).
3     (1)
For section 686A of ICTA substitute—
25
“686A
Receipts to be treated as income to which section 686 applies
(1)
Where the trustees of a settlement (other than the trustees of a unit
trust scheme)—
(a)
receive or are entitled to a payment of a kind specified in
subsection (2), or
30
(b)
are liable for tax in respect of a gain on a chargeable event of
a kind specified in subsection (2),

the payment or gain shall be treated as if it were income to which
section 686 applies.
(2)
Those payments and gains are—
35
(a)
a payment made by a company—
(i)
on the redemption, repayment or purchase of its own
shares, or
(ii)
on the purchase of rights to acquire its own shares,
(b)
a gain arising on a chargeable event in respect of which the
40
trustees are liable for tax under section 467 of ITTOIA 2005
(gains on contracts for life insurance, etc), other than a gain to
which subsection (7)(a) of that section applies,
(c)
if the trustees are resident in the United Kingdom, a profit on
the disposal of a deeply discounted security in respect of
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Finance (No.2) Bill
Schedule 13 — Settlements: amendments to ICTA and ITTOIA 2005 etc
Part 1 — Principal amendments
330

which the trustees are liable for tax under section 429 of
ITTOIA 2005,
(d)
a sum to which Chapter 4 of Part 3 of ITTOIA 2005 applies,
(e)
a profit on the disposal of a future or option in respect of
which the trustees are liable for tax under section 557 of
5
ITTOIA 2005, if none of conditions A to C in section 568 of
that Act are met,
(f)
a profit on the disposal of a deposit in respect of which the
trustees are liable for tax under section 554 of ITTOIA 2005,
(g)
the proceeds of sale of a foreign dividend coupon in respect
10
of which the trustees are liable for tax under section 573 of
ITTOIA 2005,
(h)
a sum which is chargeable to tax under section 68(2) or 71(4)
of the Finance Act 1989 (c. 26) (employee share ownership
trusts: chargeable events),
15
(i)
an offshore income gain (within the meaning of section 761 of
this Act), and
(j)
a gain on a disposal of land to which section 776 of this Act
applies.”
      (2)
This paragraph shall have effect in respect of payments made, or gains
20
arising, to the trustees of a settlement on or after 6th April 2006.
4     (1)
In section 686D of ICTA—
(a)
in subsection (1) for “trustees of a trust” substitute “trustees of a
settlement”, and
(b)
in subsection (3) for “£500” substitute “£1,000”.
25
      (2)
After section 686D of ICTA insert—
“686E
Application of section 686D where settlor has made more than one
settlement
(1)
If a settlor in relation to a settlement has made more than one
settlement, section 686D shall have effect in relation to each
30
settlement made by him with the following modification.
(2)
The reference in subsection (3) to £1000 shall be treated as a reference
to—
(a)
£200, or
(b)
such amount as may be obtained by dividing £1000 by the
35
total number of settlements in the class, provided that the
amount is not less than £200.
(3)
If there is more than one settlor in relation to a settlement, the
amount shall be the amount obtained under subsection (2)(b) in
relation to the largest class of settlements.
40
(4)
In this section a reference to a class of settlements is a reference to the
class of settlements which were made by a settlor and which are in
existence during any part of the year of assessment.”
      (3)
This paragraph shall come into force on 6th April 2006 (in relation to
settlements whenever created).
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Finance (No.2) Bill
Schedule 13 — Settlements: amendments to ICTA and ITTOIA 2005 etc
Part 1 — Principal amendments
331

5     (1)
For section 619(2) to (4) of ITTOIA 2005 (charge to tax on settlor) substitute—
“(2)
For the purposes of sections 1 to 1B of ICTA, where income of
another person is treated as income of the settlor and is charged to
tax under subsection (1)(a) or (b) above, it shall be charged in
accordance with whichever provisions of the Tax Acts would have
5
been applied in charging it if it had arisen directly to the settlor.
(3)
But nothing in this Chapter shall enable the settlor, in computing the
tax payable in accordance with this section, to take into account a loss
incurred by the trustees of the settlement or any other person.”
      (2)
This paragraph shall have effect—
10
(a)
in relation to income which arises or is treated as arising on or after
6th April 2006, and
(b)
in relation to income which is paid to a minor child of the settlor,
where the child is unmarried and is not in a civil partnership, on or
after 6th April 2006 and in relation to which section 631 of ITTOIA
15
2005 applies (irrespective of when the income arose).
6     (1)
After section 685 of ITTOIA 2005 insert—
“685A
Settlor-interested settlements
(1)
This section applies if—
(a)
a person receives an annual payment in respect of income
20
from the trustees of a settlement,
(b)
the payment is made in the exercise of a discretion (whether
of the trustees of the settlement or any other person), and
(c)
a settlor is charged to tax under section 619(1) on the income
arising to the trustees of the settlement (whether in the
25
current year of assessment or in a previous year of
assessment) out of which the annual payment is made.
(2)
This section applies only in respect of that proportion of the annual
payment which corresponds to the proportion of the total income
arising to the trustees of the settlement in respect of which a settlor is
30
chargeable to tax under section 619(1).
(3)
If and in so far as this section applies, the recipient of the annual
payment shall be treated for the purposes of this Chapter as having
paid income tax at the higher rate in respect of the annual payment.
(4)
But—
35
(a)
tax which the recipient is treated by virtue of this section as
having paid is not repayable,
(b)
tax which the recipient is treated by virtue of this section as
having paid may not be taken into account in relation to a tax
liability of the recipient in respect of any other income of his,
40
and
(c)
the annual payment shall be treated for the purposes of
sections 348 and 349(1) of ICTA as payable wholly out of
profits or gains not brought into charge to income tax.
(5)
If the recipient of the annual payment is a settlor in relation to the
45
settlement, if and in so far as this section applies the annual payment

Finance (No.2) Bill
Schedule 13 — Settlements: amendments to ICTA and ITTOIA 2005 etc
Part 2 — Minor and consequential amendments
332

shall not be treated as his income for the purposes of the Income Tax
Acts (and subsection (3) does not apply).
(6)
Section 687 of ICTA shall not apply in relation to an annual payment
if and in so far as this section applies.”
      (2)
This paragraph shall have effect for payments in respect of income made on
5
or after 6th April 2006.
Part 2
Minor and consequential amendments
7
Paragraphs 8 to 26 amend ICTA.
8
Section 220(2) shall cease to have effect.
10
9
In section 227—
(a)
in subsection (5) for “trustees (other than bare trustees)” substitute
“the trustees of a settlement”, and
(b)
in subsection (9) for “the property held on the trusts” substitute “the
settled property”.
15
10
In section 229(2)—
(a)
for “held on trusts (other than bare trusts)” substitute “settled
property”, and
(b)
for “trustees” substitute “trustees of the settlement”.
11
In section 360A—
20
(a)
in subsection (2)(b) omit the words after “is or was, a settlor”, and
(b)
in subsections (2) and (8) in each place omit the words “trustee or”.
12
In section 417(3)—
(a)
in paragraph (b) omit the words after “is or was, a settlor”, and
(b)
in paragraphs (b) and (c)(i) omit the words “trustee or”.
25
13
In section 421(1) for “trust” in each place substitute “settlement”.
14
In section 481—
(a)
in subsections (4) and (4A) for “trust” in each place substitute
“settlement”, and
(b)
in subsection (5)(k)(iii) for “of the trust” substitute “under the
30
settlement”.
15    (1)
Section 686 shall be amended as follows.
      (2)
In subsection (1) for “trustees” substitute “the trustees of a settlement”.
      (3)
In subsection (2) for “arising to trustees” substitute “arising to the trustees of
a settlement”.
35
      (4)
In subsection (2AA)—
(a)
for “arising to trustees” substitute “arising to the trustees of a
settlement”, and
(b)
in paragraph (b) for “provisions of the trust” substitute “terms of the
settlement”.
40
      (5)
In subsection (2A)(a)—

Finance (No.2) Bill
Schedule 13 — Settlements: amendments to ICTA and ITTOIA 2005 etc
Part 2 — Minor and consequential amendments
333

(a)
for “any trustees” substitute “the trustees of a settlement”, and
(b)
for “provisions of the trust” substitute “terms of the settlement”.
      (6)
In subsection (2B) for “arising to trustees” substitute “arising to the trustees
of a settlement”.
      (7)
In subsection (5A)—
5
(a)
for “in relation to trustees” substitute “in relation to the trustees of a
settlement”, and
(b)
in paragraph (f) for “686A” substitute “686A(2)(a)”.
      (8)
In subsection (6) in each place for “trustees” substitute “the trustees of a
settlement”.
10
16
In section 686D(7)(b) for “FA 1989” substitute “the Finance Act 1989 (c. 26)”.
17
In section 687(1) for “trustees” substitute “the trustees of a settlement”.
18
In section 687A(1)(a) for “trustees” substitute “the trustees of a settlement”.
19
In section 689A(1)(a) for “to trustees” substitute “to the trustees of a
settlement”.
15
20
In section 689B(1) for “any trustees” substitute “the trustees of a settlement”.
21
In section 720—
(a)
in subsection (6)(a) for “a trustee of a settlement is” substitute “the
trustees of a settlement are”,
(b)
in subsection (6)(b) for “a trustee of a settlement who is” substitute
20
“the trustees of a settlement who are”,
(c)
in the closing words of subsection (6) for “the trustee is” substitute
“the trustees are”,
(d)
in subsection (7) for “a trustee of a settlement” substitute “the
trustees of a settlement”, and
25
(e)
in subsection (8) omit paragraph (a).
22
After section 742(9) insert—
“(9A)
Where the trustees of a settlement are treated, by virtue of section
685E(7), as neither resident nor ordinarily resident in the United
Kingdom, then for the purposes of this Chapter they shall be treated
30
as resident and domiciled outside the United Kingdom.”
23
Section 764 shall cease to have effect.
24
In section 809—
(a)
in subsection (1)(a) for “trustees” substitute “the trustees of a
settlement”, and
35
(b)
in subsections (1)(a) and (2) for “trust” substitute “settlement”.
25
In section 839—
(a)
at the end of subsection (3)(b) omit “and”,
(b)
for the words after subsection (3)(c) substitute—
“(d)
if the settlement is the principal settlement in relation
40
to one or more sub-fund settlements, the trustees of
the sub-fund settlements, and