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 3 — Related amendments in IHTA 1984
391

(ii)
had provision made by regulations under section
72(8) of that Act been ignored.”
      (3)
Sub-paragraph (1) shall be deemed to have come into force on 22nd March
2006.
      (4)
Sub-paragraph (2) shall be deemed to have come into force on 22nd March
5
2006, but only in respect of property transferred into settlement on or after
that day.
Part 3
Related amendments in IHTA 1984
Commencement
10
7
The following paragraphs of this Part of this Schedule shall be deemed to
have come into force on 22nd March 2006.
Deemed disposition where omission to exercise a right increases value of another person’s estate
or of settled property not aggregated with a person’s estate
8
In section 3(3) of IHTA 1984 (failure to exercise a right treated as disposition
15
if the omission increases the value of another person’s estate or the value of
settled property in which no interest in possession subsists), for the words
from the beginning to “increased” substitute—

“Where the value of a person’s estate is diminished, and the value—
(a)
of another person’s estate, or
20
(b)
of any settled property, other than settled property treated by
section 49(1) below as property to which a person is
beneficially entitled,

is increased”.
Potentially exempt transfers: provision in consequence of section 71 of IHTA 1984 not
25
applying to property settled on or after 22nd March 2006
9     (1)
Section 3A of IHTA 1984 (potentially exempt transfers) is amended as
follows.
      (2)
In subsection (1)(a) (transfer must be one made on or after 18th March 1986),
after “1986” insert “but before 22nd March 2006”.
30
      (3)
After subsection (1) insert—
“(1A)
Any reference in this Act to a potentially exempt transfer is also a
reference to a transfer of value—
(a)
which is made by an individual on or after 22nd March 2006,
(b)
which, apart from this section, would be a chargeable transfer
35
(or to the extent to which, apart from this section, it would be
such a transfer), and
(c)
to the extent that it constitutes—
(i)
a gift to another individual,
(ii)
a gift into a disabled trust, or
40
(iii)
a gift into a bereaved minor’s trust on the coming to
an end of an immediate post-death interest.

Finance (No.2) Bill
Schedule 20 — Inheritance tax: rules for trusts etc
Part 3 — Related amendments in IHTA 1984
392

(1B)
Subsections (1) and (1A) above have effect subject to any provision
of this Act which provides that a disposition (or transfer of value) of
a particular description is not a potentially exempt transfer.”
      (4)
In subsection (2) (extent to which transfer is a gift to another individual),
after “subsection (1)(c)” insert “or (1A)(c)(i)”.
5
      (5)
After subsection (3) insert—
“(3A)
Subject to subsection (6) below, a transfer of value falls within
subsection (1A)(c)(ii) above to the extent that the value transferred is
attributable to property which, by virtue of the transfer, becomes
settled property to which section 89 or 89A below applies.
10
(3B)
A transfer of value falls within subsection (1A)(c)(iii) above to the
extent that the value transferred is attributable to settled property
(whenever settled) that becomes property to which section 71A
below applies in the following circumstances—
(a)
under the settlement, a person (“L”) is beneficially entitled to
15
an interest in possession in the settled property,
(b)
the interest in possession is an immediate post-death interest,
(c)
on or after 22nd March 2006, but during L’s life, the interest
in possession comes to an end,
(d)
L is beneficially entitled to the interest in possession
20
immediately before it comes to an end, and
(e)
on the interest in possession coming to an end, the
property—
(i)
continues to be held on the trusts of the settlement,
and
25
(ii)
becomes property to which section 71A below
applies.”
      (6)
In subsection (7) (application of section in relation to charge to tax under
section 52), after “subsection (1)(a)” insert “or (1A)(a)”.
Person’s “estate” not to include certain interests in possession
30
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
beneficially entitled, except that person’s estate immediately before death
does not include excluded property), for “except that the” substitute “except
that—
35
(a)
the estate of a person—
(i)
does not include an interest in possession in settled
property to which section 71A or 71D below applies,
and
(ii)
does not include an interest in possession that falls
40
within subsection (1A) below, and
(b)
the”.
      (3)
After subsection (1) insert—
“(1A)
An interest in possession falls within this subsection if—
(a)
it is an interest in possession in settled property,
45

Finance (No.2) Bill
Schedule 20 — Inheritance tax: rules for trusts etc
Part 3 — Related amendments in IHTA 1984
393

(b)
the settled property is not property to which section 71A or
71D below applies,
(c)
the person is beneficially entitled to the interest in possession,
(d)
the person became beneficially entitled to the interest in
possession on or after 22nd March 2006, and
5
(e)
the interest in possession is—
(i)
not an immediate post-death interest,
(ii)
not a disabled person’s interest, and
(iii)
not a transitional serial interest.”
Life assurance policies entered into before 22nd March 2006
10
11    (1)
After section 46 of IHTA 1984 insert—
“46A
Contract of life insurance entered into before 22nd March 2006 which
on that day is settled property in which interest in possession subsists
(1)
Subsections (2) and (4) below apply where—
(a)
a settlement commenced before 22nd March 2006,
15
(b)
a contract of life insurance was entered into before that day,
(c)
a premium payable under the contract is paid, or an allowed
variation is made to the contract, at a particular time on or
after that day,
(d)
immediately before that day, and at all subsequent times up
20
to the particular time, there were rights under the contract
that—
(i)
were comprised in the settlement, and
(ii)
were settled property in which a transitionally-
protected interest (whether or not the same such
25
interest throughout that period) subsisted,
(e)
rights under the contract become, by reference to payment of
the premium or as a result of the variation,—
(i)
comprised in the settlement, and
(ii)
part of the settled property in which the then-current
30
transitionally-protected interest subsists, and
(f)
any variation of the contract on or after 22nd March 2006 but
before the particular time, so far as it is a variation that—
(i)
increased the benefits secured by the contract, or
(ii)
extended the term of the insurance provided by the
35
contract,

was an allowed variation.
(2)
For the purposes of the provisions mentioned in subsection (3)
below—
(a)
the rights mentioned in subsection (1)(e) above shall be taken
40
to have become comprised in the settlement, and
(b)
the person beneficially entitled to the then-current
transitionally-protected interest shall be taken to have
become beneficially entitled to his interest in possession so
far as it subsists in those rights,
45

before 22nd March 2006.
(3)
Those provisions are—

Finance (No.2) Bill
Schedule 20 — Inheritance tax: rules for trusts etc
Part 3 — Related amendments in IHTA 1984
394

section 3A(2) above;
section 5(1A) above;
section 49(1A) and (1B) below;
section 51(1A) and (1B) below;
section 52(2A) and (3A) below;
5
section 53(1A) and (2A) below;
section 54(2A) and (2B) below;
section 54A(1A) below;
section 57A(1A) below;
section 58(1B) and (1C) below;
10
section 59(1) and (2) below;
section 80(4) below;
section 100(1A) below;
section 101(1A) below;
section 102ZA(1) of the Finance Act 1986 (gifts with
15
reservation); and
sections 72(1A) and (2A) and 73(2A) of the 1992 Act.
(4)
If payment of the premium is a transfer of value made by an
individual, that transfer of value is a potentially exempt transfer.
(5)
In this section—
20
“allowed variation”, in relation to a contract, means a variation
that takes place by operation of, or as a result of exercise of
rights conferred by, provisions forming part of the contract
immediately before 22nd March 2006;
“transitionally-protected interest” means—
25
(a)
an interest in possession to which a person was
beneficially entitled immediately before, and on,
22nd March 2006, or
(b)
a transitional serial interest.
46B
Contract of life insurance entered into before 22nd March 2006 which
30
immediately before that day is property to which section 71 applies
(1)
Subsections (2) and (5) below apply where—
(a)
a settlement commenced before 22nd March 2006,
(b)
a contract of life insurance was entered into before that day,
(c)
a premium payable under the contract is paid, or an allowed
35
variation is made to the contract, at a particular time on or
after that day,
(d)
immediately before that day, and at all subsequent times up
to the particular time, there were rights under the contract
that—
40
(i)
were comprised in the settlement, and
(ii)
were settled property to which section 71 below
applied,
(e)
rights under the contract become, by reference to payment of
the premium or as a result of the variation, comprised in the
45
settlement, and
(f)
any variation of the contract on or after 22nd March 2006 but
before the particular time, so far as it was a variation that—

Finance (No.2) Bill
Schedule 20 — Inheritance tax: rules for trusts etc
Part 3 — Related amendments in IHTA 1984
395

(i)
increased the benefits secured by the contract, or
(ii)
extended the term of the insurance provided by the
contract,

was an allowed variation.
(2)
If the rights mentioned in subsection (1)(e) above would, but for
5
subsection (1A) of section 71 below, become property to which that
section applies, those rights shall become settled property to which
that section applies when they become comprised in the settlement.
(3)
Subsection (5) below also applies where—
(a)
a settlement commenced before 22nd March 2006,
10
(b)
a contract of life insurance was entered into before that day,
(c)
a premium payable under the contract is paid, or an allowed
variation is made to the contract, at a particular time on or
after that day when there are rights under the contract—
(i)
that are comprised in the settlement and are settled
15
property to which section 71A or 71D below applies,
(ii)
that immediately before that day were settled
property to which section 71 below applied, and
(iii)
that on or after that day, but before the particular
time, became property to which section 71A or 71D
20
below applies in circumstances falling within
subsection (4) below,
(d)
rights under the contract become, by reference to payment of
the premium or as a result of the variation, comprised in the
settlement, and
25
(e)
any variation of the contract on or after 22nd March 2006 but
before the particular time, so far as it was a variation that—
(i)
increased the benefits secured by the contract, or
(ii)
extended the term of the insurance provided by the
contract,
30

was an allowed variation.
(4)
The circumstances referred to in subsection (3)(c)(iii) above are—
(a)
in the case of property to which section 71D below applies,
that the property on becoming property to which section 71D
below applies ceased to be property to which section 71
35
below applied without ceasing to be settled property;
(b)
in the case of property to which section 71A below applies—
(i)
that the property on becoming property to which
section 71A below applies ceased, by the operation of
section 71(1B) below, to be property to which section
40
71 below applied, or
(ii)
that the property, having become property to which
section 71D below applied in circumstances falling
within paragraph (a) above, on becoming property to
which 71A below applies ceased, by the operation of
45
section 71D(5)(a) below, to be property to which
section 71D below applied.
(5)
If payment of the premium is a transfer of value made by an
individual, that transfer of value is a potentially exempt transfer.

Finance (No.2) Bill
Schedule 20 — Inheritance tax: rules for trusts etc
Part 3 — Related amendments in IHTA 1984
396

(6)
In this section “allowed variation”, in relation to a contract, means a
variation that takes place by operation of, or as a result of exercise of
rights conferred by, provisions forming part of the contract
immediately before 22nd March 2006.”
      (2)
Sub-paragraph (1) shall be deemed to have come into force on 22nd March
5
2006.
Tax where interest in possession ends, or is treated as ending, during beneficiary’s life
12
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—
10
“(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.
15
(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 or 71D below applies to the property in which
the interest subsists.”
20
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
25
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.”
30
      (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
35
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
40
amended as follows.
      (2)
After subsection (1) insert—
“(1A)
Tax shall not be chargeable under section 52 above if—

Finance (No.2) Bill
Schedule 20 — Inheritance tax: rules for trusts etc
Part 3 — Related amendments in IHTA 1984
397

(a)
the person whose interest comes to an end became
beneficially entitled to the interest before 22nd March 2006,
(b)
the interest comes to an end on or after that day, and
(c)
immediately before the interest comes to an end, section 71A
or 71D below applies to the property in which the interest
5
subsists.”
      (3)
After subsection (2) insert—
“(2A)
Where—
(a)
a person becomes beneficially entitled on or after 22nd March
2006 to an interest in possession in settled property, and
10
(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
possession in the property”.”
Non-aggregation with deceased person’s estate of property in which he had interest in
15
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
20
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—
25
(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
30
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
35
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
40
(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.”