Finance (No.2) Bill

House of Commons

Session 2005 - 06
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Finance (No.2) Bill

Finance (No.2) Bill
Schedule 20 — Inheritance tax: rules for trusts etc
Part 3 — Related amendments in IHTA 1984
382

attributable to property which, by virtue of the transfer, becomes
settled property to which section 89 below applies.”
Person’s “estate” not to include certain interests in possession
10    (1)
Section 5 of IHTA 1984 (meaning of “estate”) is amended as follows.
      (2)
In subsection (1) (person’s estate is aggregate of all property to which person
5
beneficially entitled, except that person’s estate immediately before death
does not include excluded property), for “except that the” substitute “except
that—
(a)
the estate of a person—
(i)
does not include an interest in possession in settled
10
property to which section 71A below applies, and
(ii)
does not include an interest in possession that falls
within subsection (1A) below, and
(b)
the”.
      (3)
After subsection (1) insert—
15
“(1A)
An interest in possession falls within this subsection if—
(a)
it is an interest in possession in settled property,
(b)
the settled property is not property to which section 71A
below applies,
(c)
the person is beneficially entitled to the interest in possession,
20
(d)
the person became beneficially entitled to the interest in
possession on or after 22nd March 2006, and
(e)
the interest in possession is—
(i)
not an immediate post-death interest,
(ii)
not a disabled person’s interest, and
25
(iii)
not a transitional serial interest.”
Tax where interest in possession ends, or is treated as ending, during beneficiary’s life
11
In section 51 of IHTA 1984 (disposal of interest in possession not a transfer
of value, but treated as coming to end of interest), after subsection (1)
insert—
30
“(1A)
Where the interest disposed of is one to which the person became
beneficially entitled on or after 22nd March 2006, subsection (1)
above applies in relation to the disposal only if the interest is—
(a)
an immediate post-death interest, or
(b)
a transitional serial interest.
35
(1B)
Where the interest disposed of is one to which the person became
beneficially entitled before 22nd March 2006, subsection (1) above
does not apply in relation to the disposal if, immediately before the
disposal, section 71A below applies to the property in which the
interest subsists.”
40
12
In IHTA 1984, after section 51 insert—
“51A
Interest ceasing to be immediate post-death interest
(1)
Subsection (2) below applies where—

Finance (No.2) Bill
Schedule 20 — Inheritance tax: rules for trusts etc
Part 3 — Related amendments in IHTA 1984
383

(a)
on or after 22nd March 2006 a person becomes beneficially
entitled to an interest in possession in settled property,
(b)
the interest in possession, at the time when the person
becomes beneficially entitled to it, is an immediate post-
death interest, and
5
(c)
the interest in possession ceases, at a time during the person’s
life, to be an immediate post-death interest without the
person ceasing at the same time to be beneficially entitled to
the interest in possession.
(2)
The interest shall be treated for the purposes of this Chapter as
10
coming to an end on its ceasing to be an immediate post-death
interest (and tax shall be charged accordingly under section 52
below).
(3)
References in this section to any property or to an interest in any
property include references to part of any property or interest.”
15
13    (1)
Section 52 of IHTA 1984 (tax on termination of interest in possession) is
amended as follows.
      (2)
After subsection (2) insert—
“(2A)
Where the interest mentioned in subsection (1) or (2) above is one to
which the person became beneficially entitled on or after 22nd March
20
2006, that subsection applies in relation to the coming to an end of the
interest only if the interest is—
(a)
an immediate post-death interest,
(b)
a disabled person’s interest, or
(c)
a transitional serial interest.”
25
      (3)
After subsection (3) insert—
“(3A)
Where the interest mentioned in paragraph (a) of subsection (3)
above is one to which the person mentioned in that paragraph
became beneficially entitled on or after 22nd March 2006, that
subsection applies in relation to the transaction only if the interest
30
is—
(a)
an immediate post-death interest,
(b)
a disabled person’s interest, or
(c)
a transitional serial interest.”
14    (1)
Section 53 of IHTA 1984 (exceptions from tax charge under section 52) is
35
amended as follows.
      (2)
After subsection (1) insert—
“(1A)
Tax shall not be chargeable under section 52 above if—
(a)
the person whose interest comes to an end became
beneficially entitled to the interest before 22nd March 2006,
40
(b)
the interest comes to an end on or after that day, and
(c)
immediately before the interest comes to an end, section 71A
below applies to the property in which the interest subsists.”
      (3)
After subsection (2) insert—
“(2A)
Where—
45

Finance (No.2) Bill
Schedule 20 — Inheritance tax: rules for trusts etc
Part 3 — Related amendments in IHTA 1984
384

(a)
a person becomes beneficially entitled on or after 22nd March
2006 to an interest in possession in settled property, and
(b)
the interest is not a disabled person’s interest,

subsection (2) above applies in relation to the coming to an end of the
interest with the omission of the words “or to another interest in
5
possession in the property”.”
      (4)
After subsection (4) insert—
“(4A)
Subsections (2) to (4) above do not apply in any case where tax is
chargeable under section 52 above by virtue of section 51A above.”
Non-aggregation with deceased person’s estate of property in which he had interest in
10
possession if property reverts to settlor or passes to settlor’s spouse or civil partner etc
15    (1)
Section 54 of IHTA 1984 (exceptions from charge on death) is amended as
follows.
      (2)
After subsection (2) insert—
“(2A)
Where a person becomes beneficially entitled on or after 22nd March
15
2006 to an interest in possession in settled property, subsections (1)
and (2) above apply in relation to the interest only if it is—
(a)
a disabled person’s interest, or
(b)
a transitional serial interest.
(2B)
Where—
20
(a)
a person (“B”) becomes beneficially entitled on or after 22nd
March 2006 to an interest in possession in settled property,
(b)
B dies,
(c)
the interest in possession, throughout the period beginning
with when B becomes beneficially entitled to it and ending
25
with B’s death, is an immediate post-death interest,
(d)
the settlor died before B’s death but less than two years
earlier, and
(e)
on B’s death, the settlor’s widow or widower, or surviving
civil partner, becomes beneficially entitled to the settled
30
property and is domiciled in the United Kingdom,

the value of the settled property shall be left out of account in
determining for the purposes of this Act the value of B’s estate
immediately before his death.”
      (3)
In subsection (3) (section 53(5) and (6) apply in relation to subsections (1) and
35
(2))—
(a)
for “(1) and (2)” substitute “(1), (2) and (2B)”, and
(b)
at the end add “, but as if the reference in section 53(5)(a) above to
section 53(4)(b) above were to subsection (2)(b) or (2B) above.”
Rate of tax on ending of interest in possession in property settled during settlor’s life
40
16    (1)
Section 54A of IHTA 1984 (special rate of charge on coming to end of interest
in possession in settled property affected by potentially exempt transfer) is
amended as follows.

Finance (No.2) Bill
Schedule 20 — Inheritance tax: rules for trusts etc
Part 3 — Related amendments in IHTA 1984
385

      (2)
After subsection (1) insert—
“(1A)
Where a person becomes beneficially entitled on or after 22nd March
2006 to an interest in possession in settled property, subsection (1)(b)
above applies in relation to the person’s death only if the interest is—
(a)
a disabled person’s interest, or
5
(b)
a transitional serial interest.”
      (3)
In subsection (2) (circumstances in which section applies to a chargeable
transfer)—
(a)
in paragraph (c), omit “, other than property to which section 71
below applies”, and
10
(b)
in paragraph (d)(i), omit “or to which section 71 below applies”.
      (4)
Where a chargeable transfer to which section 54A of IHTA 1984 applies was
made before 22nd March 2006, that section has effect in relation to that
transfer without the amendments made by sub-paragraph (3).
Property entering maintenance fund after death of person entitled to interest in possession
15
17
In section 57A of IHTA 1984 (relief where property enters fund for
maintenance of historic buildings etc), after subsection (1) insert—
“(1A)
Where the interest mentioned in subsection (1)(a) above is one to
which the person became beneficially entitled on or after 22nd March
2006, subsection (2) below does not apply unless, immediately before
20
the person’s death, the interest was—
(a)
an immediate post-death interest,
(b)
a disabled person’s interest, or
(c)
a transitional serial interest.”
“Relevant property” not to include property held on trust for a bereaved child
25
18
In section 58(1)(b) of IHTA 1984 (property to which certain sections apply is
not relevant property for purposes of Chapter 3 of Part 3), after “71,” insert
“71A,”.
“Relevant property” to include property held on employee trusts or newspaper trusts if certain
interests in possession subsist in the property
30
19    (1)
Section 58 of IHTA 1984 (meaning of “relevant property” in Chapter 3 of Part
3) is amended as follows.
      (2)
In subsection (1)(b) (which provides that property to which section 86
applies is not relevant property), after “86 below applies” insert “(but see
subsection (1A) below)”.
35
      (3)
After subsection (1) insert—
“(1A)
Settled property to which section 86 below applies is “relevant
property” for the purposes of this Chapter if—
(a)
an interest in possession subsists in that property, and
(b)
that interest falls within subsection (1B) or (1C) below.
40
(1B)
An interest in possession falls within this subsection if—

Finance (No.2) Bill
Schedule 20 — Inheritance tax: rules for trusts etc
Part 3 — Related amendments in IHTA 1984
386

(a)
an individual is beneficially entitled to the interest in
possession,
(b)
the individual became beneficially entitled to the interest in
possession on or after 22nd March 2006, and
(c)
the interest in possession is—
5
(i)
not an immediate post-death interest,
(ii)
not a disabled person’s interest, and
(iii)
not a transitional serial interest.
(1C)
An interest in possession falls within this subsection if—
(a)
a company is beneficially entitled to the interest in
10
possession,
(b)
the business of the company consists wholly or mainly in the
acquisition of interests in settled property,
(c)
the company has acquired the interest in possession for full
consideration in money or money’s worth from an individual
15
who was beneficially entitled to it,
(d)
the individual became beneficially entitled to the interest in
possession on or after 22nd March 2006, and
(e)
immediately before the company acquired the interest in
possession, the interest in possession was neither an
20
immediate post-death interest nor a transitional serial
interest.”
Certain interests in possession to which a person becomes entitled on or after 22nd March 2006
not to be “qualifying interests in possession” for purposes of Chapter 3 of Part 3 of IHTA 1984
20    (1)
Section 59 of IHTA 1984 (settlements without interests in possession:
25
meaning of “qualifying interest in possession”) is amended as follows.
      (2)
For subsection (1) substitute—
“(1)
In this Chapter “qualifying interest in possession” means—
(a)
an interest in possession—
(i)
to which an individual is beneficially entitled, and
30
(ii)
which, if the individual became beneficially entitled
to the interest in possession on or after 22nd March
2006, is an immediate post-death interest, a disabled
person’s interest or a transitional serial interest, or
(b)
an interest in possession to which, where subsection (2)
35
below applies, a company is beneficially entitled.”
      (3)
In subsection (2) (cases where interest in possession to which a company is
entitled is a “qualifying” interest), after paragraph (b) insert “, and
(c)
if the individual became beneficially entitled to the interest in
possession on or after 22nd March 2006, the interest is an
40
immediate post-death interest, or a transitional serial
interest, immediately before the company acquires it.”
      (4)
Where a chargeable transfer to which section 54A of IHTA 1984 applies was
made before 22nd March 2006, that section has effect in relation to that
transfer as if in that section “qualifying interest in possession” has the
45
meaning it would have apart from sub-paragraphs (1) to (3).

Finance (No.2) Bill
Schedule 20 — Inheritance tax: rules for trusts etc
Part 3 — Related amendments in IHTA 1984
387

      (5)
In the heading to Chapter 3 of Part 3 of IHTA 1984, at the end add “, and
certain settlements in which interests in possession subsist”.
New meaning of “qualifying interest in possession” not to apply in section 72 of IHTA 1984
21    (1)
Section 72 of IHTA 1984 (property leaving employee trusts and newspaper
trusts) is amended as follows.
5
      (2)
In subsection (1) (section 72 applies to property to which section 86 applies
if no qualifying interest in possession subsists in it), for “if no qualifying
interest in possession subsists in it” substitute “if—
(a)
no interest in possession subsists in it to which an individual
is beneficially entitled, and
10
(b)
no company-purchased interest in possession subsists in it.”
      (3)
After subsection (1) insert—
“(1A)
For the purposes of subsection (1)(b) above, an interest in possession
is “company-purchased” if—
(a)
a company is beneficially entitled to the interest in
15
possession,
(b)
the business of the company consists wholly or mainly in the
acquisition of interests in settled property, and
(c)
the company has acquired the interest in possession for full
consideration in money or money’s worth from an individual
20
who was beneficially entitled to it.
(1B)
Section 59(3) and (4) above apply for the purposes of subsection
(1A)(c) above as for those of section 59(2)(b) above, but as if the
references to the condition set out in section 59(2)(a) above were to
the condition set out in subsection (1A)(b) above.”
25
No charge under section 71B etc where property held on trusts for bereaved minors becomes
held on trusts for charitable purposes etc
22
In section 76(1) of IHTA 1984 (which provides for tax not to be charged
under certain provisions of Chapter 3 of Part 3 where property becomes held
for charitable purposes etc), after “71,” insert “71A,”.
30
No postponement of commencement date of settlement where property settled on or after 22nd
March 2006 and settlor, or spouse or civil partner, has interest in possession at outset
23
In section 80(3) of IHTA 1984 (initial interest of settlor, or spouse or civil
partner: section does not apply where property settled before 27th March
1974), after “1974” insert “or on, or after, 22nd March 2006”.
35
Protective trusts
24
In section 88 of IHTA 1984 (protective trusts), after subsection (2) insert—
“(3)
Where—
(a)
settled property became held before 22nd March 2006 on
trusts to the like effect as those specified in section 33(1)(i) of
40
the Trustee Act 1925, and
(b)
as a result of the failure or determination of those trusts on or
after 22nd March 2006, the principal beneficiary is treated by

Finance (No.2) Bill
Schedule 20 — Inheritance tax: rules for trusts etc
Part 3 — Related amendments in IHTA 1984
388

subsection (2)(b) above as beneficially entitled to an interest
in possession,

this Act shall apply in relation to that interest in possession as if the
principal beneficiary became beneficially entitled to that interest in
possession before 22nd March 2006.
5
(4)
Subsection (5) below applies where—
(a)
settled property becomes held on or after 22nd March 2006
on trusts to the like effect as those specified in section 33(1)(i)
of the Trustee Act 1925,
(b)
the interest of the principal beneficiary under those trusts
10
is—
(i)
an immediate post-death interest, or
(ii)
a transitional serial interest, and
(c)
as a result of the failure or determination of those trusts, the
principal beneficiary is treated by subsection (2)(b) above as
15
beneficially entitled to an interest in possession.
(5)
This Act shall apply—
(a)
as if that interest in possession were a continuation of the
immediate post-death interest or transitional serial interest,
and
20
(b)
as if the immediate post-death interest, or transitional serial
interest, had not come to an end on the failure or
determination of the trusts.
(6)
Subsection (2) above does not apply in a case where—
(a)
settled property becomes held on or after 22nd March 2006
25
on trusts to the like effect as those specified in section 33(1)(i)
of the Trustee Act 1925, and
(b)
the interest of the principal beneficiary under those trusts is
neither an immediate post-death interest nor a transitional
serial interest.”
30
Alterations of capital etc of close company where participator holds shares etc in company as
trustee of settled property in which an interest in possession subsists
25
In section 100 of IHTA 1984 (alteration of close company’s capital etc where
participator is trustee of settlement under which an individual is beneficially
entitled to an interest in possession), after subsection (1) insert—
35
“(1A)
Where the interest in possession is one to which the individual
became beneficially entitled on or after 22nd March 2006, this section
applies only if the interest in possession is—
(a)
an immediate post-death interest,
(b)
a disabled person’s interest, or
40
(c)
a transitional serial interest.”
Close company’s interest in possession treated as interest of its participators
26
In section 101 of IHTA 1984 (where close company has interest in possession
in settled property, its participators are treated for purposes of IHTA 1984 as