Finance (No.2) Bill

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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
398

Rate of tax on ending of interest in possession in property settled during settlor’s life
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.
      (2)
After subsection (1) insert—
5
“(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
(b)
a transitional serial interest.”
10
      (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
(b)
in paragraph (d)(i), omit “or to which section 71 below applies”.
15
      (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
17
In section 57A of IHTA 1984 (relief where property enters fund for
20
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
the person’s death, the interest was—
25
(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
18
In section 58(1)(b) of IHTA 1984 (property to which certain sections apply is
30
not relevant property for purposes of Chapter 3 of Part 3), after “71,” insert
“71A, 71D,”.
“Relevant property” to include property held on employee trusts or newspaper trusts if certain
interests in possession subsist in the property
19    (1)
Section 58 of IHTA 1984 (meaning of “relevant property” in Chapter 3 of Part
35
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)”.
      (3)
After subsection (1) insert—
40
“(1A)
Settled property to which section 86 below applies is “relevant
property” for the purposes of this Chapter if—

Finance (No.2) Bill
Schedule 20 — Inheritance tax: rules for trusts etc
Part 3 — Related amendments in IHTA 1984
399

(a)
an interest in possession subsists in that property, and
(b)
that interest falls within subsection (1B) or (1C) below.
(1B)
An interest in possession falls within this subsection if—
(a)
an individual is beneficially entitled to the interest in
possession,
5
(b)
the individual became beneficially entitled to the interest in
possession on or after 22nd March 2006, and
(c)
the interest in possession is—
(i)
not an immediate post-death interest,
(ii)
not a disabled person’s interest, and
10
(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
possession,
(b)
the business of the company consists wholly or mainly in the
15
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
who was beneficially entitled to it,
(d)
the individual became beneficially entitled to the interest in
20
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
immediate post-death interest nor a transitional serial
interest.”
25
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:
meaning of “qualifying interest in possession”) is amended as follows.
      (2)
For subsection (1) substitute—
30
“(1)
In this Chapter “qualifying interest in possession” means—
(a)
an interest in possession—
(i)
to which an individual is beneficially entitled, and
(ii)
which, if the individual became beneficially entitled
to the interest in possession on or after 22nd March
35
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)
below applies, a company is beneficially entitled.”
      (3)
In subsection (2) (cases where interest in possession to which a company is
40
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
immediate post-death interest, or a transitional serial
interest, immediately before the company acquires it.”
45

Finance (No.2) Bill
Schedule 20 — Inheritance tax: rules for trusts etc
Part 3 — Related amendments in IHTA 1984
400

      (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
meaning it would have apart from sub-paragraphs (1) to (3).
      (5)
In the heading to Chapter 3 of Part 3 of IHTA 1984, at the end add “, and
5
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.
      (2)
In subsection (1) (section 72 applies to property to which section 86 applies
10
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
(b)
no company-purchased interest in possession subsists in it.”
15
      (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
possession,
20
(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
who was beneficially entitled to it.
25
(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.”
No charge under sections 71B, 71E etc where property held on trusts for bereaved child becomes
30
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, 71D,”.
No postponement of commencement date of settlement where property settled on or after 22nd
35
March 2006 unless settlor, or spouse or civil partner, has immediate post-death interest
23
In section 80 of IHTA 1984 (postponement of commencement date of
settlement where settlor, or spouse or civil partner or surviving spouse or
surviving civil partner, has interest in possession at outset), after subsection
(3) insert—
40
“(4)
Where the occasion first referred to in subsection (1) above occurs on
or after 22nd March 2006, this section applies only if the interest in
possession first referred to in that subsection is an immediate post-

Finance (No.2) Bill
Schedule 20 — Inheritance tax: rules for trusts etc
Part 3 — Related amendments in IHTA 1984
401

death interest.”
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
5
trusts to the like effect as those specified in section 33(1)(i) of
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
subsection (2)(b) above as beneficially entitled to an interest
10
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.
(4)
Subsection (5) below applies where—
15
(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
is—
20
(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
beneficially entitled to an interest in possession.
25
(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
(b)
as if the immediate post-death interest, or transitional serial
30
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
on trusts to the like effect as those specified in section 33(1)(i)
35
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.”
Alterations of capital etc of close company where participator holds shares etc in company as
40
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

Finance (No.2) Bill
Schedule 20 — Inheritance tax: rules for trusts etc
Part 3 — Related amendments in IHTA 1984
402

entitled to an interest in possession), after subsection (1) insert—
“(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,
5
(b)
a disabled person’s interest, or
(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
10
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
15
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
20
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
25
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
30
participator as the person making the disposal).”
Distributions within two years of person’s death out of property settled by his will
27    (1)
Section 144 of IHTA 1984 (distribution etc from property settled by will) is
amended as follows.
      (2)
In subsection (1)—
35
(a)
for “This section applies” substitute “Subsection (2) below applies”,
and
(b)
in paragraph (a), for “(apart from this section)” substitute “(apart
from subsection (2) below)”.
      (3)
After subsection (1) insert—
40
“(1A)
Where the testator dies on or after 22nd March 2006, subsection (1)
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.”
45

Finance (No.2) Bill
Schedule 20 — Inheritance tax: rules for trusts etc
Part 4 — Related amendments in TCGA 1992
403

      (4)
In subsection (2), for “this section” (in both places) substitute “this
subsection”.
      (5)
After subsection (2) insert—
“(3)
Subsection (4) below applies where—
(a)
a person dies on or after 22nd March 2006,
5
(b)
property comprised in the person’s estate immediately
before his death is settled by his will, and
(c)
within the period of two years after his death, but before an
immediate post-death interest or a disabled person’s interest
has subsisted in the property, there occurs an event that
10
involves causing property comprised in the testator’s estate
to be held on trusts that would, if they had in fact been
established by the testator’s will, have resulted in—
(i)
an immediate post-death interest subsisting in the
property, or
15
(ii)
section 71A or 71D above applying to the property.
(4)
Where this subsection applies by virtue of an event—
(a)
this Act shall have effect as if the will had provided that on
the testator’s death the property should be held as it is held
after the event, but
20
(b)
tax shall not be charged on that event under any provision of
Chapter 3 of Part 3 of this Act.”
Interpretation of IHTA 1984
28
In section 272 of IHTA 1984 (general interpretation), in the appropriate place
insert—
25
““disabled person’s interest” has the meaning given by section
89B above;”
““immediate post-death interest” means an immediate post-
death interest for the purposes of Chapter 2 of Part 3 (see
section 49A above);”
30
““transitional serial interest” means a transitional serial interest
for the purposes of Chapter 2 of Part 3 (see section 49B
above);”.
Part 4
Related amendments in TCGA 1992
35
29    (1)
TCGA 1992 is amended in accordance with the following paragraphs of this
Part of this Schedule.
      (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
40
as follows.
      (2)
After subsection (1) insert—
“(1A)
Where the interest in possession mentioned in subsection (1) above
is one to which the person becomes entitled on or after 22nd March

Finance (No.2) Bill
Schedule 20 — Inheritance tax: rules for trusts etc
Part 5 — Property subject to a reservation
404

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.
(1B)
An interest falls within this subsection if—
(a)
the interest is—
5
(i)
an immediate post-death interest, within the meaning
given by section 49A of the Inheritance Tax Act 1984,
or
(ii)
a transitional serial interest, within the meaning given
by section 49B of that Act, or
10
(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
operation of subsection (1) above as applied by subsection (2) below
(but see subsection (2A) below).”
15
      (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
2006—
(a)
subsection (2) above, and
20
(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
person’s death, the interest falls within subsection (1B) above.”
31
In section 73 (no chargeable gain on deemed disposal under section 71(1)
25
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
one to which the person becomes entitled on or after 22nd March
2006, subsections (1) and (2) above apply in relation to that interest
30
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
(d) insert—
“(da)
by virtue of subsection (2) of section 71B of that Act (trusts for
35
bereaved minors) does not constitute an occasion on which
inheritance tax is chargeable under that section,”.
Part 5
Property subject to a reservation
33    (1)
FA 1986 is amended as follows.
40
      (2)
After section 102 (gifts with reservation) insert—
“102ZA
Gifts with reservation: termination of interests in possession
(1)
Subsection (2) below applies where—