Finance (No.2) Bill

House of Commons

Session 2005 - 06
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Other Bills before Parliament

Finance (No.2) Bill

Finance (No.2) Bill
Schedule 20 — Inheritance tax: rules for trusts etc
Part 4 — Related amendments in TCGA 1992
389

the persons entitled to the interest), after subsection (1) insert—
“(1A)
Where the interest in possession mentioned in subsection (1) above
is one to which the company became entitled on or after 22nd March
2006 (whether or not the company was a close company when it
became entitled to the interest), subsection (1) above applies in
5
relation to the interest only if it is—
(a)
an immediate post-death interest, or
(b)
a transitional serial interest.
(1B)
Subsection (1C) below applies where any of the participators
mentioned in subsection (1) above (“the prior participator”) disposes
10
of rights and interests of his in the company to another person (“the
later participator”).
(1C)
If and so far as the later participator is a participator in the company
by virtue of having any of the rights and interests disposed of,
subsection (1) above is to be applied to him only as a participator in
15
his own right (in particular, he is not to be treated by virtue of that
subsection as having entitlement to the interest in possession as a
result of disposal to him of entitlement that the prior participator was
treated as having by virtue of that subsection, but this is without
prejudice to the application of this Act in relation to the prior
20
participator as the person making the disposal).”
Distributions within two years of person’s death out of property settled by his will
27
In section 144 of IHTA 1984 (distribution etc from property settled by will),
after subsection (1) insert—
“(1A)
Where the testator dies on or after 22nd March 2006, subsection (1)
25
above shall have effect as if the reference to any interest in possession
were a reference to any interest in possession that is—
(a)
an immediate post-death interest, or
(b)
a disabled person’s interest.”
Interpretation of IHTA 1984
30
28
In section 272 of IHTA 1984 (general interpretation), in the appropriate place
insert—
““disabled person’s interest” has the meaning given by section
89(2A) above;”
““immediate post-death interest” means an immediate post-
35
death interest for the purposes of Chapter 2 of Part 3 (see
section 49A above);”
““transitional serial interest” means a transitional serial interest
for the purposes of Chapter 2 of Part 3 (see section 49C
above);”.
40
Part 4
Related amendments in TCGA 1992
29    (1)
TCGA 1992 is amended in accordance with the following paragraphs of this
Part of this Schedule.

Finance (No.2) Bill
Schedule 20 — Inheritance tax: rules for trusts etc
Part 4 — Related amendments in TCGA 1992
390

      (2)
The following paragraphs of this Part of this Schedule shall be deemed to
have come into force on 22nd March 2006.
30    (1)
Section 72 (death of person entitled to an interest in possession) is amended
as follows.
      (2)
After subsection (1) insert—
5
“(1A)
Where the interest in possession mentioned in subsection (1) above
is one to which the person becomes entitled on or after 22nd March
2006, the first sentence of that subsection applies in relation to that
interest only if, immediately before the person’s death, the interest
falls within subsection (1B) below.
10
(1B)
An interest falls within this subsection if—
(a)
the interest is—
(i)
an immediate post-death interest, within the meaning
given by section 49A of the Inheritance Tax Act 1984,
or
15
(ii)
a transitional serial interest, within the meaning given
by section 49C of that Act, or
(b)
section 71A of that Act (trusts for bereaved minors) applies to
the property in which the interest subsists.
(1C)
Subsection (1A) above does not have effect in relation to the
20
operation of subsection (1) above as applied by subsection (2) below
(but see subsection (2A) below).”
      (3)
After subsection (2) insert—
“(2A)
Where the interest in possession mentioned in subsection (2) above
is one to which the person becomes entitled on or after 22nd March
25
2006—
(a)
subsection (2) above, and
(b)
the first sentence of subsection (1) above as applied by
subsection (2) above,

apply in relation to that interest only if, immediately before the
30
person’s death, the interest falls within subsection (1B) above.”
31
In section 73 (no chargeable gain on deemed disposal under section 71(1)
where person becomes absolutely entitled on death of person entitled to
interest in possession), after subsection (2) insert—
“(2A)
Where the interest in possession referred to in subsection (1) above is
35
one to which the person becomes entitled on or after 22nd March
2006, subsections (1) and (2) above apply in relation to that interest
only if, immediately before the person’s death, the interest falls
within section 72(1B).”
32
In section 260(2) (disposals where gain may be held over), after paragraph
40
(d) insert—
“(da)
by virtue of subsection (2) of section 71B of that Act (trusts for
bereaved minors) does not constitute an occasion on which
inheritance tax is chargeable under that section,”.

Finance (No.2) Bill
Schedule 20 — Inheritance tax: rules for trusts etc
Part 5 — Property subject to a reservation
391

Part 5
Property subject to a reservation
33    (1)
FA 1986 is amended as follows.
      (2)
After section 102 (gifts with reservation) insert—
“102ZA
Gifts with reservation: termination of interests in possession
5
(1)
Subsection (2) below applies where—
(a)
an individual is beneficially entitled to an interest in
possession in settled property,
(b)
either—
(i)
the individual became beneficially entitled to the
10
interest in possession before 22nd March 2006, or
(ii)
the individual became beneficially entitled to the
interest in possession on or after 22nd March 2006 and
the interest is an immediate post-death interest, a
disabled person’s interest or a transitional serial
15
interest, and
(c)
the interest in possession comes to an end during the
individual’s life.
(2)
For the purposes of—
(a)
section 102 above, and
20
(b)
Schedule 20 to this Act,

the individual shall be taken (if, or so far as, he would not otherwise
be) to dispose, on the coming to an end of the interest in possession,
of the no-longer-possessed property by way of gift.
(3)
In subsection (2) above “the no-longer-possessed property” means
25
the property in which the interest in possession subsisted
immediately before it came to an end, other than any of it to which
the individual becomes absolutely and beneficially entitled in
possession on the coming to an end of the interest in possession.”
      (3)
In Schedule 20 (supplementary rules about gifts with reservation), after
30
paragraph 4 insert—
“Termination of interests in possession
4A    (1)
This paragraph applies where—
(a)
under section 102ZA of this Act, an individual (“D”) is
taken to dispose of property by way of gift, and
35
(b)
the property continues to be settled property immediately
after the disposal.
      (2)
Paragraphs 2 to 4 above shall not apply but, subject to the
following provisions of this paragraph, the principal section and
the following provisions of this Schedule shall apply as if the
40
property comprised in the gift consisted of the property
comprised in the settlement on the material date, except in so far
as that property neither is, nor represents, nor is derived from,
property originally comprised in the gift.

Finance (No.2) Bill
Schedule 21 — Taxable property held by investment-regulated pension schemes
392

      (3)
Any property which—
(a)
on the material date is comprised in the settlement, and
(b)
is derived, directly or indirectly, from a loan made by D to
the trustees of the settlement,

shall be treated for the purposes of sub-paragraph (2) above as
5
derived from property originally comprised in the gift.
      (4)
If the settlement comes to an end at some time before the material
date as respects all or any of the property which, if D had died
immediately before that time, would be treated as comprised in
the gift,—
10
(a)
the property in question, other than property to which D
then becomes absolutely and beneficially entitled in
possession, and
(b)
any consideration (not consisting of rights under the
settlement) given by D for any of the property to which D
15
so becomes entitled,

shall be treated as comprised in the gift (in addition to any other
property so comprised).
      (5)
Where, under any trust or power relating to settled property,
income arising from that property after the material date is
20
accumulated, the accumulations shall not be treated for the
purposes of sub-paragraph (2) above as derived from that
property.”
      (4)
Sub-paragraphs (1) to (3) shall be deemed to have come into force on 22nd
March 2006, but only as respects cases where an interest in possession comes
25
to an end on or after that day.
Schedule 21
Section 159

Taxable property held by investment-regulated pension schemes
1
In section 271 of TCGA 1992 (exemptions), after subsection (1A) insert—
“(1B)
But subsection (1A) does not prevent such a gain from being treated
30
as a chargeable gain for the purposes of sections 185F to 185I of the
Finance Act 2004 (scheme chargeable payments: gains from taxable
property).”
2
Part 4 of FA 2004 (pension schemes) is amended as follows.
3     (1)
Section 160 (payments by registered pension schemes) is amended as
35
follows.
      (2)
After subsection (7) insert—
“(7A)
Sections 185A to 185I contain provision about the receipt of income
and gains from taxable property.”
      (3)
In subsection (8), after “borrowing” insert “and the receipt of income and
40
gains from taxable property.”

Finance (No.2) Bill
Schedule 21 — Taxable property held by investment-regulated pension schemes
393

4
In section 173 (benefits), after subsection (7) insert—
“(7A)
This section does not apply if—
(a)
the pension scheme is an investment-regulated pension
scheme, and
(b)
the asset consists of taxable property.”
5
5
After section 174 insert—
“174A
Taxable property held by investment-regulated pension schemes
(1)
An investment-regulated pension scheme is to be treated as making
an unauthorised payment to a member of the pension scheme if—
(a)
the pension scheme acquires an interest in taxable property,
10
and
(b)
the interest is held by the pension scheme for the purposes of
an arrangement under the pension scheme relating to the
member.
(2)
An investment-regulated pension scheme is to be treated as making
15
an unauthorised payment to a member of the pension scheme if—
(a)
an interest in taxable property is held by the pension scheme
for the purposes of an arrangement under the pension
scheme relating to the member, and
(b)
the property is improved.
20
(3)
An investment-regulated pension scheme is to be treated as making
an unauthorised payment to a member of the pension scheme if—
(a)
an interest in property which is not residential property is
held by the pension scheme for the purposes of an
arrangement under the pension scheme relating to the
25
member, and
(b)
the property is converted or adapted to become residential
property.
(4)
Schedule 29A makes provision supplementing this section; and in
that Schedule—
30
(a)
Part 1 defines “investment-regulated pension scheme”,
(b)
Part 2 defines “taxable property” (and “residential
property”),
(c)
Part 3 explains what it means to acquire, and to hold, an
interest in taxable property, and
35
(d)
Part 4 contains provision for calculating the amounts of
unauthorised payments treated as made by this section and
explains when the unauthorised payments are treated as
made.”
6
After section 185 insert—
40
“Income and gains from taxable property
185A
Income from taxable property
(1)
An investment-regulated pension scheme is to be treated as having
made a scheme chargeable payment if the pension scheme holds an
interest in taxable property in a tax year.
45

Finance (No.2) Bill
Schedule 21 — Taxable property held by investment-regulated pension schemes
394

(2)
The amount of the scheme chargeable payment depends on whether
a person who holds the interest in the property directly receives
profits arising from the interest in the tax year.
(3)
If a person who holds the interest in the property directly receives
such profits in the tax year, the amount of the scheme chargeable
5
payment is the greater of—
(a)
an amount equal to the amount of the annual profits from the
interest in the property (see section 185B(1)), and
(b)
the amount of the deemed profits from the interest in the
property for the year (see sections 185B(2) and 185C).
10
(4)
If no person who holds the interest in the property directly receives
such profits in the tax year, the amount of the scheme chargeable
payment is the amount of the deemed profits from the interest in the
property for the year (see sections 185B(2) and 185C).
(5)
But where section 185D applies, the amount of the scheme
15
chargeable payment is the amount found under subsection (3) or (4)
as apportioned to the pension scheme in accordance with that
section.
(6)
Section 185E makes provision for credits against income tax charged
under section 239 (scheme sanction charge) in respect of a scheme
20
chargeable payment treated as made by virtue of this section.
185B
Annual profits and deemed profits
(1)
For the purposes of section 185A(3) the amount of the annual profits
from the interest in the property is the total amount of profits
received from the interest in the tax year—
25
(a)
by each person who holds the interest directly, and
(b)
at a time when the property is scheme-held taxable property.
(2)
For the purposes of section 185A(3) and (4) the amount of the
deemed profits from the interest in the property for the tax year is—
where—
30
DMV is the deemed market value of the interest in the property
for the year (see section 185C),
DTP is the number of days in the year for which the property is
scheme-held taxable property, and
DY is the number of days in the year.
35
(3)
In this Part “scheme-held taxable property” means property which is
taxable property an interest in which is held by the pension scheme.
185C
Deemed market value
(1)
For the purposes of section 185B(2), where no person who holds the
interest in the property directly during the tax year does so by virtue
40
of a lease of residential property, the deemed market value of the
interest for the year is—
where—

Finance (No.2) Bill
Schedule 21 — Taxable property held by investment-regulated pension schemes
395

MV is the opening market value (see subsection (2)),
UP is the total of any unauthorised payments treated as made
by the pension scheme under section 174A in relation to the
property in the tax year, other than any such payment treated
as made by virtue of the property becoming scheme-held
5
taxable property in the year, and
RPI is the figure expressed as a decimal which represents the
percentage increase in the retail prices index between the first
day in the tax year on which the property is scheme-held
taxable property and the last such day (or, if there is no such
10
increase, is nil).
(2)
In subsection (1) “the opening market value” means—
(a)
if the property is not scheme-held taxable property
immediately before the beginning of the tax year, the market
value of the interest in the property immediately after the
15
time during the year when the property first becomes
scheme-held taxable property, and
(b)
otherwise, the deemed market value of the interest for the
previous tax year.
(3)
For the purposes of section 185B(2), where a person who holds the
20
interest in the property directly during the tax year does so by virtue
of a lease of residential property, the deemed market value of the
interest for the year is the relevant rental value of the property
calculated in accordance with paragraph 34 of Schedule 29A on the
following assumptions—
25
(a)
that the lease was granted when the property first became
scheme-held taxable property;
(b)
that the term of the lease is 50 years;
(c)
that a fully commercial rent is payable for the first five years
of that term;
30
(d)
that thereafter the rent is reviewed on an upwards-only basis.
185D
Apportionment to pension scheme
(1)
This section applies where the pension scheme holds the interest in
the property indirectly for the whole of the period in the tax year for
which the property is scheme-held taxable property.
35
(2)
The amount that would otherwise be the amount of the scheme
chargeable payment is to be apportioned to the pension scheme by
applying paragraphs 41 to 43 of Schedule 29A to it as if it were the
total taxable amount in relation to an unauthorised payment treated
as made—
40
(a)
by the pension scheme,
(b)
in connection with the acquisition of the interest in the
property, and
(c)
at the end of the last day in the tax year on which the property
is scheme-held taxable property.
45
(3)
But where—
(a)
the amount found in relation to the pension scheme on the
day mentioned in paragraph (c) of subsection (2), differs from