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 5 — Property subject to a reservation
405

(a)
an individual is beneficially entitled to an interest in
possession in settled property,
(b)
either—
(i)
the individual became beneficially entitled to the
interest in possession before 22nd March 2006, or
5
(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
interest, and
10
(c)
the interest in possession comes to an end during the
individual’s life.
(2)
For the purposes of—
(a)
section 102 above, and
(b)
Schedule 20 to this Act,
15

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
the property in which the interest in possession subsisted
20
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
paragraph 4 insert—
25
“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
(b)
the property continues to be settled property immediately
30
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
property comprised in the gift consisted of the property
35
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.
      (3)
Any property which—
(a)
on the material date is comprised in the settlement, and
40
(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
derived from property originally comprised in the gift.
      (4)
If the settlement comes to an end at some time before the material
45
date as respects all or any of the property which, if D had died

Finance (No.2) Bill
Schedule 20 — Inheritance tax: rules for trusts etc
Part 6 — Conditional exemption: relief from charges
406

immediately before that time, would be treated as comprised in
the gift,—
(a)
the property in question, other than property to which D
then becomes absolutely and beneficially entitled in
possession, and
5
(b)
any consideration (not consisting of rights under the
settlement) given by D for any of the property to which D
so becomes entitled,

shall be treated as comprised in the gift (in addition to any other
property so comprised).
10
      (5)
Where, under any trust or power relating to settled property,
income arising from that property after the material date is
accumulated, the accumulations shall not be treated for the
purposes of sub-paragraph (2) above as derived from that
property.”
15
      (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
to an end on or after that day.
Part 6
Conditional exemption: relief from charges
20
34    (1)
Section 79 of IHTA 1984 (subsection (3) of which provides for charges to tax
where, in the case of settled property designated under section 31 on a claim
under section 79, an event occurs that would be chargeable under section 32
or 32A if the claim had been under section 30) is amended as follows.
      (2)
After subsection (5) (amount on which tax charged under subsection (3))
25
insert—
“(5A)
Where the event giving rise to a charge to tax under subsection (3)
above is a disposal on sale, and the sale—
(a)
was not intended to confer any gratuitous benefit on any
person, and
30
(b)
was either a transaction at arm’s length between persons not
connected with each other or a transaction such as might be
expected to be made at arm’s length between persons not
connected with each other,

the value of the property at the time of that event shall be taken for
35
the purposes of subsection (5) above to be equal to the proceeds of
the sale.”
      (3)
For subsection (7) (which provides that the “relevant period” mentioned in
subsection (6) begins with the latest of certain listed days and ends with the
day before the event giving rise to the charge under subsection (3))
40
substitute—
“(7)
In subsection (6) above “the relevant period” means the period given
by subsection (7A) below or, if shorter, the period given by
subsection (7B) below.
(7A)
The period given by this subsection is the period beginning with the
45
latest of—

Finance (No.2) Bill
Schedule 21 — Taxable property held by investment-regulated pension schemes
407

(a)
the day on which the settlement commenced,
(b)
the date of the last ten-year anniversary of the settlement to
fall before the day on which the property became comprised
in the settlement,
(c)
the date of the last ten-year anniversary of the settlement to
5
fall before the day on which the property was designated
under section 31 above on a claim under this section, and
(d)
13th March 1975,

and ending with the day before the event giving rise to the charge.
(7B)
The period given by this subsection is the period equal in length to
10
the number of relevant-property days in the period—
(a)
beginning with the day that is the latest of those referred to in
paragraphs (a) to (d) of subsection (7A) above, and
(b)
ending with the day before the event giving rise to the charge.
(7C)
For the purposes of subsection (7B) above, a day is a “relevant-
15
property day” if at any time on that day the property was relevant
property.”
      (4)
After subsection (9) insert—
“(9A)
Subsection (9B) below applies where the same event gives rise—
(a)
to a charge under subsection (3) above in relation to any
20
property, and
(b)
to a charge under section 32 or 32A above in relation to that
property.
(9B)
If the amount of each of the charges is the same, each charge shall
have effect as a charge for one half of the amount that would be
25
charged apart from this subsection; otherwise, whichever of the
charges is lower in amount shall have effect as if it were a charge the
amount of which is nil.”
Schedule 21
Section 158

Taxable property held by investment-regulated pension schemes
30
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
as a chargeable gain for the purposes of sections 185F to 185I of the
Finance Act 2004 (scheme chargeable payments: gains from taxable
property).”
35
2
Part 4 of FA 2004 (pension schemes) is amended as follows.
3     (1)
Section 160 (payments by registered pension schemes) is amended as
follows.
      (2)
After subsection (7) insert—
“(7A)
Sections 185A to 185I contain provision about the receipt of income
40
and gains from taxable property.”

Finance (No.2) Bill
Schedule 21 — Taxable property held by investment-regulated pension schemes
408

      (3)
In subsection (8), after “borrowing” insert “and the receipt of income and
gains from taxable property.”
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
5
scheme, and
(b)
the asset consists of taxable property.”
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
10
an unauthorised payment to a member of the pension scheme if—
(a)
the pension scheme acquires an interest in taxable property,
and
(b)
the interest is held by the pension scheme for the purposes of
an arrangement under the pension scheme relating to the
15
member.
(2)
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 taxable property is held by the pension scheme
for the purposes of an arrangement under the pension
20
scheme relating to the member, and
(b)
the property is improved.
(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
25
held by the pension scheme for the purposes of an
arrangement under the pension scheme relating to the
member, and
(b)
the property is converted or adapted to become residential
property.
30
(4)
Schedule 29A makes provision supplementing this section; and in
that Schedule—
(a)
Part 1 defines “investment-regulated pension scheme”,
(b)
Part 2 defines “taxable property” (and “residential
property”),
35
(c)
Part 3 explains what it means to acquire, and to hold, an
interest in taxable property, and
(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
40
made.”

Finance (No.2) Bill
Schedule 21 — Taxable property held by investment-regulated pension schemes
409

6
After section 185 insert—
“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
5
interest in taxable property in a tax year.
(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
10
such profits in the tax year, the amount of the scheme chargeable
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
15
property for the year (see sections 185B(2) and 185C).
(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).
20
(5)
But where section 185D applies, the amount of the scheme
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
25
under section 239 (scheme sanction charge) in respect of a scheme
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
30
received from the interest in the tax year—
(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—
35

where—
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
40
DY is the number of days in the year.
(3)
In this Part “scheme-held taxable property” means property—

Finance (No.2) Bill
Schedule 21 — Taxable property held by investment-regulated pension schemes
410

(a)
which is taxable property, and
(b)
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
5
of a lease of residential property, the deemed market value of the
interest for the year is—

where—
MV is the opening market value (see subsection (2)),
UP is the total of any unauthorised payments treated as made
10
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
taxable property in the year, and
RPI is the figure expressed as a decimal which represents the
15
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
increase, is nil).
(2)
In subsection (1) “the opening market value” means—
20
(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
time during the year when the property first becomes
scheme-held taxable property, and
25
(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
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
30
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—
(a)
that the lease was granted when the property first became
scheme-held taxable property;
35
(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;
(d)
that afterwards the rent is reviewed on an upwards-only
basis.
40
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.
(2)
The amount that would otherwise be the amount of the scheme
45
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

Finance (No.2) Bill
Schedule 21 — Taxable property held by investment-regulated pension schemes
411

total taxable amount in relation to an unauthorised payment treated
as made—
(a)
by the pension scheme,
(b)
in connection with the acquisition of the interest in the
property, and
5
(c)
at the end of the last day in the tax year on which the property
is scheme-held taxable property.
(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
10
(b)
the amount that would be found in relation to the pension
scheme under that subsection on another day in the tax year
on which the property is scheme-held taxable property,

the amount to be apportioned to the pension scheme under this
section is the average of the amounts produced by applying
15
subsection (2) in relation to the pension scheme on each day in the tax
year on which the property is scheme-held taxable property.
185E
Credit for tax paid
(1)
This section applies where—
(a)
the pension scheme holds the interest in the property
20
indirectly in the tax year,
(b)
a person who holds the interest directly receives profits
arising from the interest at a time in the tax year when the
property is scheme-held taxable property,
(c)
tax is payable on those profits by that person (assuming them
25
to be the highest part of the person’s income for the tax year
in which they are received), and
(d)
that tax has been paid.
(2)
The amount determined under subsection (3) is to be allowed as a
credit against any income tax charged under section 239 in respect of
30
the scheme chargeable payment treated as made by virtue of the
pension scheme holding the interest in the property in the tax year.
(3)
That amount is a proportion of the tax payable and paid determined
by reference to the proportion of the amount that would otherwise
be the amount of the scheme chargeable payment that is apportioned
35
to the pension scheme under section 185D.
(4)
Where—
(a)
by virtue of this section an amount is allowed as a credit
against income tax charged under section 239, and
(b)
the amount of tax payable and paid by reference to which the
40
amount of the credit was calculated is subsequently varied,

the amount of the credit is to be varied accordingly, and any
necessary adjustments are to be made to give effect to the variation
(whether by making assessments or otherwise).
185F
Gains from taxable property
45
(1)
An investment-regulated pension scheme is to be treated as having
made a scheme chargeable payment where—