Finance (No.2) Bill

House of Commons

Session 2005 - 06
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Finance (No.2) Bill

Finance (No.2) Bill
Schedule 12 — Settlements: amendment of TCGA 1992 etc
Part 3 — Consequential and minor amendments
322

settlement and its sub-fund settlements shall be the exempt
amount available to the trustees of the principal settlement in
relation to the year, determined in accordance with paragraph 1 or
2 above as if no sub-fund elections had been made.
      (2)
But if there are two or more non-excluded settlements in the class
5
consisting of a principal settlement and its sub-fund settlements,
the exempt amount available to the trustees of each settlement in
the class in relation to the year shall be the amount specified in
sub-paragraph (1) above divided by the number of non-excluded
settlements in the class.
10
      (3)
In this paragraph—
“excluded settlement” has the meaning given by paragraph
2(7) above, and
references to a settlement having sub-fund settlements, and
similar expressions, are references to a settlement being the
15
principal settlement in respect of which one or more sub-
fund elections are treated as having taken effect.”
45
Paragraphs 42 to 44 shall have effect in relation to years of assessment
beginning on or after 6th April 2006.
Amendments of other Acts
20
46    (1)
In the first column of the table in section 98 of TMA 1970 (failure to make
required returns, etc) insert at the appropriate place—
“paragraph 14 of Schedule 4ZA to the 1992 Act”.
      (2)
In the second column of the table in section 98 of TMA 1970 insert at the
appropriate place—
25
“paragraph 12 of Schedule 4ZA to the 1992 Act”.
      (3)
This paragraph shall come into force on 6th April 2006.
47    (1)
For section 761(7)(b) of ICTA (offshore income gain: trustee residence
condition) substitute—
“(b)
at the time of the disposal referred to in paragraph (a) above
30
the trustees of the settlement are neither resident nor
ordinarily resident in the United Kingdom for the purposes
of the 1992 Act,”.
      (2)
This paragraph shall have effect in relation to disposals made on or after 6th
April 2007 (in relation to settlements whenever created).
35
48    (1)
In section 30 of FA 2005 (trusts for vulnerable persons: capital gains)—
(a)
after subsection (1) insert—
“(1A)
For the purposes of subsection (1)(b) the effect of section 77(1)
of TCGA 1992 shall be disregarded if the settlor is treated as
having an interest in the settlement by reason only of the
40
application of section 77(2A) of that Act.”, and
(b)
after subsection (3) insert—
“(3A)
If this section has effect in relation to chargeable gains
accruing to the trustees of a settlement in a tax year, section
77 of TCGA 1992 shall not have effect in relation to the gains,
45

Finance (No.2) Bill
Schedule 12 — Settlements: amendment of TCGA 1992 etc
Part 3 — Consequential and minor amendments
323

(but this subsection shall not affect the operation of section
31(2)).”
      (2)
In section 34(3) of that Act (disabled persons) for the words from “the
powers” to the end of the subsection substitute “—
(a)
a power conferred on the trustees by section 32 of the Trustee
5
Act 1925 or section 33 of the Trustee Act (Northern Ireland)
1958) (powers of advancement),
(b)
a power conferred on the trustees by the law of a jurisdiction
other than England and Wales or Northern Ireland which
makes provision similar to the provisions specified in
10
paragraph (a), or
(c)
a power of advancement which is conferred on the trustees
by the instrument creating the settlement, or by another
instrument made in accordance with the terms of the
settlement, and which is subject to the same restrictions as
15
those specified in section 32(1)(a) and (c) of the Trustee Act
1925 (c. 19).”
      (3)
In section 35(4) of that Act (relevant minors) for the words from “the
powers” to the end of the subsection substitute “—
(a)
a power conferred on the trustees by section 32 of the Trustee
20
Act 1925 or section 33 of the Trustee Act (Northern Ireland)
1958) (powers of advancement),
(b)
a power conferred on the trustees by the law of a jurisdiction
other than England and Wales or Northern Ireland which
makes provision similar to the provisions specified in
25
paragraph (a), or
(c)
a power of advancement which is conferred on the trustees
by the instrument creating the settlement, or by another
instrument made in accordance with the terms of the
settlement, and which is subject to the same restrictions as
30
those specified in section 32(1)(a) and (c) of the Trustee Act
1925.”
      (4)
After section 37(6) of that Act (vulnerable person election) insert—
“(7)
Where—
(a)
a vulnerable person election has effect in relation to
35
qualifying trusts,
(b)
the property held on those trusts is treated for the purposes
of TCGA 1992 and of the Tax Acts as comprised in a sub-fund
settlement, and
(c)
the vulnerable person election was not made by the trustees
40
of the sub-fund settlement,

the vulnerable person election shall have effect, in relation to the
trusts mentioned in paragraph (a), in respect of matters arising at or
after the time when the sub-fund election is treated as having taken
effect, as if it had been made by the trustees of the sub-fund
45
settlement and the vulnerable person.
(8)
In relation to matters arising before the time when the sub-fund
election is treated as having taken effect, nothing in subsection (7)—

Finance (No.2) Bill
Schedule 13 — Settlements: amendments to ICTA and ITTOIA 2005 etc
Part 1 — Principal amendments
324

(a)
relieves the trustees of the settlement which is the principal
settlement in relation to the sub-fund settlement of their
obligation under subsection (6), or
(b)
prevents a notice from being given to those trustees under
section 40(1) or (3).
5
(9)
In this section—
(a)
“principal settlement” has the meaning given by paragraph 1
of Schedule 4ZA to TCGA 1992,
(b)
“sub-fund election” has the meaning given by paragraph 2 of
that Schedule,
10
(c)
“sub-fund settlement” has the meaning given by paragraph 1
of that Schedule, and
(d)
the time when a sub-fund election is treated as having taken
effect shall be the time when it is treated as having taken
effect under paragraph 2 of that Schedule.”
15
      (5)
This paragraph shall come into force on 6th April 2006 (in relation to
vulnerable person elections whenever made).
Schedule 13
Section 89

Settlements: amendments to ICTA and ITTOIA 2005 etc
Part 1
20
Principal amendments
1     (1)
Before section 686 of ICTA (rate of tax applicable to trusts) insert—
“685A
Meaning of “settled property”
(1)
For the purposes of the Tax Acts, unless the context otherwise
requires,
25
(a)
“settled property” means any property held in trust other
than—
(i)
property held by a person as nominee for another,
(ii)
property held by a person as trustee for another
person who is absolutely entitled as against the
30
trustee, and
(iii)
property held by a person as trustee for another
person who would be absolutely entitled as against
the trustee if he were not an infant or otherwise under
a disability, and
35
(b)
references, however expressed, to property comprised in a
settlement are references to settled property.
(2)
For the purposes of the Tax Acts, a reference to a person who is or
would be absolutely entitled to property as against the trustee—
(a)
means a person who has the exclusive right (subject to
40
satisfying the right of the trustees to resort to the property for
the payment of duty, taxes, costs or other outgoings) to direct
how the property shall be dealt with, and

Finance (No.2) Bill
Schedule 13 — Settlements: amendments to ICTA and ITTOIA 2005 etc
Part 1 — Principal amendments
325

(b)
includes two or more persons who are or would be jointly
absolutely entitled as against the trustee.
685B
Meaning of “settlor”
(1)
In the Tax Acts, unless the context otherwise requires—
(a)
“settlor” in relation to a settlement means the person, or any
5
of the persons, who has made or is treated for the purposes of
the Tax Acts as having made the settlement, and
(b)
a person is a settlor of property which—
(i)
is settled property by reason of his having made the
settlement (or by reason of an event which causes him
10
to be treated under this Act as having made the
settlement), or
(ii)
derives from property to which sub-paragraph (i)
applies.
(2)
A person is treated for the purposes of the Tax Acts as having made
15
a settlement if—
(a)
he has made or entered into the settlement, directly or
indirectly, or
(b)
the settled property, or property from which the settled
property is derived, is or includes property of which he was
20
competent to dispose immediately before his death and the
settlement arose on his death, whether by will, on his
intestacy, or otherwise.
(3)
A person is, in particular, treated for the purposes of the Tax Acts as
having made a settlement if—
25
(a)
he has provided property directly or indirectly for the
purposes of the settlement, or
(b)
he has undertaken to provide property directly or indirectly
for the purposes of the settlement.
(4)
Where one person (A) makes or enters into a settlement in
30
accordance with reciprocal arrangements with another person (B),
for the purposes of the Tax Acts—
(a)
B shall be treated as having made the settlement, and
(b)
A shall not be treated as having made the settlement by
reason only of the reciprocal arrangements.
35
(5)
In subsection (2)(b) the reference to property of which a deceased
person was competent to dispose is a reference to property of the
deceased which (otherwise than in right of a power of appointment
or of the testamentary power conferred by statute to dispose of
entailed interests) he could, if of full age and capacity, have disposed
40
of by his will, assuming that all the property were situated in
England and, if he was not domiciled in the United Kingdom, that he
was domiciled in England, and includes references to his severable
share in any property to which, immediately before his death, he was
beneficially entitled as a joint tenant.
45
(6)
A person who has been a settlor in relation to a settlement shall be
treated for the purposes of the Tax Acts as having ceased to be a
settlor in relation to the settlement if—

Finance (No.2) Bill
Schedule 13 — Settlements: amendments to ICTA and ITTOIA 2005 etc
Part 1 — Principal amendments
326

(a)
no property of which he is the settlor is comprised in the
settlement,
(b)
he has not undertaken to provide property directly or
indirectly for the purposes of the settlement in the future, and
(c)
he has not made reciprocal arrangements with another
5
person for that other person to enter into the settlement in the
future.
(7)
For the purpose of this section and sections 685C and 685D property
is derived from other property—
(a)
if it derives (directly or indirectly and wholly or partly) from
10
that property or any part of it, and
(b)
in particular, if it derives (directly or indirectly and wholly or
partly) from income from that property or any part of it.
(8)
In this section “arrangements” includes any scheme, agreement or
understanding, whether or not legally enforceable.
15
685C
Transfer between settlements: identification of settlor
(1)
This section applies in relation to a transfer of property from the
trustees of one settlement (“Settlement 1”) to the trustees of another
(“Settlement 2”) otherwise than—
(a)
for full consideration, or
20
(b)
by way of a bargain made at arm’s length.
(2)
In this section “transfer of property” means—
(a)
a disposal of property by the trustees of Settlement 1, and
(b)
the acquisition by the trustees of Settlement 2 of—
(i)
property disposed of by the trustees of Settlement 1,
25
or
(ii)
property created by the disposal;

and a reference to transferred property is a reference to property
acquired by the trustees of Settlement 2 on the disposal.
(3)
For the purposes of the Tax Acts, except where the context otherwise
30
requires—
(a)
the settlor (or each settlor) of the property disposed of by the
trustees of Settlement 1 shall be treated from the time of the
disposal as having made Settlement 2, and
(b)
if there is more than one settlor of the property disposed of by
35
the trustees of Settlement 1, each settlor shall be treated in
relation to Settlement 2 as the settlor of a proportionate part
of the transferred property.
(4)
For the purposes of the Tax Acts, except where the context otherwise
requires, if and to the extent that the property disposed of by the
40
trustees of Settlement 1 was provided for the purposes of Settlement
1, or is derived from property provided for the purposes of
Settlement 1, the transferred property shall be treated from the time
of the disposal as having been provided for the purposes of
Settlement 2.
45
(5)
If transferred property is treated by virtue of subsection (4) as having
been provided for the purposes of Settlement 2—

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

(a)
the person who provided the property disposed of by the
trustees of Settlement 1, or property from which it was
derived, for the purposes of Settlement 1 shall be treated as
having provided the transferred property, and
(b)
if more than one person provided the property disposed of
5
by the trustees of Settlement 1, or property from which it was
derived, for the purposes of Settlement 1, each of them shall
be treated as having provided a proportionate part of the
transferred property.
(6)
But subsections (3) and (4) do not apply in relation to a transfer of
10
property—
(a)
which occurs by reason only of the assignment or assignation
by a beneficiary under Settlement 1 of an interest in that
settlement to the trustees of Settlement 2,
(b)
which occurs by reason only of the exercise of a general
15
power of appointment, or
(c)
to which section 685D(6) applies.
(7)
There is an acquisition or disposal of property for the purposes of
this section if there would be an acquisition or disposal of property
for the purposes of the 1992 Act.
20
685D
Variation of will or intestacy, etc: identification of settlor
(1)
This section applies where—
(a)
a disposition of property following a person’s death is varied,
and
(b)
section 62(6) of the 1992 Act applies in respect of the
25
variation.
(2)
Where property becomes settled property in consequence of the
variation (and would not, but for the variation, have become settled
property), a person mentioned in subsection (3) shall be treated for
the purposes of the Tax Acts, except where the context otherwise
30
requires—
(a)
as having made the settlement, and
(b)
as having provided the property for the purposes of the
settlement.
(3)
Those persons are—
35
(a)
a person who immediately before the variation was entitled
to the property, or to property from which it derives,
absolutely as legatee,
(b)
a person who would have become entitled to the property, or
to property from which it derives, absolutely as legatee but
40
for the variation,
(c)
a person who immediately before the variation would have
been entitled to the property, or to property from which it
derives, absolutely as legatee but for being an infant or other
person under a disability, and
45
(d)
a person who would, but for the variation, have become
entitled to the property, or to property from which it derives,
absolutely as legatee if he had not been an infant or other
person under a disability.

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

(4)
For the purposes of this section—
(a)
“legatee” includes any person taking under a testamentary
disposition or on an intestacy or partial intestacy, whether he
takes beneficially or as trustee,
(b)
property taken under a testamentary disposition or on an
5
intestacy or partial intestacy includes any property
appropriated by the personal representatives in or towards
satisfaction of a pecuniary legacy or any other interest or
share in the property devolving under the disposition or
intestacy, and
10
(c)
a person taking under a donatio mortis causa shall be treated
as a legatee and his acquisition as made at the time of the
donor’s death.
(5)
Where—
(a)
property would have become comprised in a settlement—
15
(i)
which arose on the deceased person’s death (whether
in accordance with his will, on his intestacy or
otherwise, or
(ii)
which was already in existence on the deceased
person’s death (whether or not the deceased person
20
was a settlor in relation to that settlement), but
(b)
in consequence of the variation the property, or property
derived from it, becomes comprised in another settlement,

the deceased person shall be treated for the purposes of the Tax Acts,
except where the context otherwise requires, as having made the
25
other settlement.
(6)
Where—
(a)
immediately before the variation property is comprised in a
settlement and is property of which the deceased person is a
settlor, and
30
(b)
immediately after the variation the property, or property
derived from it, becomes comprised in another settlement,

the deceased person shall be treated for the purposes of the Tax Acts,
except where the context otherwise requires, as having made the
other settlement.
35
(7)
If a person is treated as having made a settlement under subsection
(5) or (6), for the purposes of the Tax Acts he shall be treated as
having made the settlement immediately before his death.
(8)
But subsection (7) does not apply in relation to a settlement which
arose on the person’s death.
40
685E
Trustees of settlements
(1)
For the purposes of the Tax Acts the trustees of a settlement shall,
unless the context otherwise requires, together be treated as if they
were a single person (distinct from the persons who are the trustees
of the settlement from time to time).
45
(2)
The deemed person referred to in subsection (1) shall be treated for
the purposes of the Tax Acts as resident and ordinarily resident in
the United Kingdom at any time when a condition in subsection (3)
or (4) is satisfied.