Income Tax Bill

House of Commons

Session 2006 - 07
Internet Publications
Other Bills before Parliament

Income Tax Bill

Income Tax Bill
Part 9 — Special rules about settlements and trustees
Chapter 3 — Special rates for trustees’ income
253

(b)
references to the trustees of a trust are to be read as references to the
trustees of a settlement.
Chapter 3
Special rates for trustees’ income
479
Trustees’ accumulated or discretionary income to be charged at special rates
5
(1)
This section applies if—
(a)
accumulated or discretionary income arises to the trustees of a
settlement, and
(b)
the income does not arise under a trust established for charitable
purposes only.
10
(2)
Income tax is charged on the income at the rates referred to in this section
instead of at the rates which would otherwise apply (for which see Chapter 2
of Part 2 (rates at which income tax is charged)).
(3)
Income tax is charged on the income at the dividend trust rate so far as the
income is dividend income.
15
(4)
Otherwise, income tax is charged on the income at the trust rate.
(5)
Section 488 disapplies this section in cases relating to approved share incentive
plans.
480
Meaning of “accumulated or discretionary income”
(1)
Income is accumulated or discretionary income so far as—
20
(a)
it must be accumulated, or
(b)
it is payable at the discretion of the trustees or any other person,

and it is not excluded by subsection (3).
(2)
The cases covered by subsection (1)(b) include cases where the trustees have,
or any other person has, any discretion over one or more of the following
25
matters—
(a)
whether, or the extent to which, the income is to be accumulated,
(b)
the persons to whom the income is to be paid, and
(c)
how much of the income is to be paid to any person.
(3)
Income is excluded for the purposes of subsection (1) so far as—
30
(a)
before being distributed, it is the income of any person other than the
trustees,
(b)
it is income from property within subsection (4), or
(c)
it is income from service charges (as defined in section 18(1) of the
Landlord and Tenant Act 1985 (c. 70)) held on trust by a relevant
35
housing body (see subsection (5)).
(4)
Property is within this subsection if it—
(a)
is held for the purposes of a superannuation fund to which section
615(3) of ICTA (superannuation funds relating to undertakings outside
the UK) applies, but
40
(b)
is not held as a member of a property investment LLP.

Income Tax Bill
Part 9 — Special rules about settlements and trustees
Chapter 3 — Special rates for trustees’ income
254

(5)
“Relevant housing body” means—
(a)
a local authority,
(b)
a registered social landlord,
(c)
a Northern Ireland housing association,
(d)
a charitable housing association,
5
(e)
a charitable housing trust,
(f)
a housing action trust established under Part 3 of the Housing Act 1988
(c. 50),
(g)
the Housing Corporation, and
(h)
the Northern Ireland Housing Executive.
10
(6)
In subsection (5)—
“charitable housing association” means a society, body or company
which—
(a)
meets the conditions in section 5(1)(a) and (b) of the Housing
Act 1985 (c. 68), and
15
(b)
is registered in a register kept under section 3 of the Charities
Act 1993 (c. 10) or section 3 of the Charities and Trustee
Investment (Scotland) Act 2005 (asp. 10),
“charitable housing trust” means a corporation or body which—
(a)
meets the condition in section 6(a) or (b) of the Housing Act
20
1985, and
(b)
is registered in a register kept under section 3 of the Charities
Act 1993 or section 3 of the Charities and Trustee Investment
(Scotland) Act 2005 (asp. 10),
“Northern Ireland housing association” means a body registered in the
25
register maintained under Article 14 of the Housing (Northern Ireland)
Order 1992 (S.I. 1992/1725 (N.I. 15)), and
“registered social landlord” means a body registered in a register
maintained under section 1 of the Housing Act 1996 (c. 52) or section 57
of the Housing (Scotland) Act 2001 (asp. 10).
30
481
Other amounts to be charged at special rates for trustees
(1)
This section applies if—
(a)
the trustees of a settlement are liable for income tax on an amount of a
type set out in section 482,
(b)
the trustees are not trustees of a unit trust scheme, and
35
(c)
the amount is not income arising under a trust established for
charitable purposes only.
(2)
Income tax is charged on the amount at one of the rates referred to in this
section instead of at the rate which would otherwise apply (for which see
Chapter 2 of Part 2 (rates at which income tax is charged)).
40

This is subject to subsection (5).
(3)
If the amount is within Type 1 as set out in section 482, income tax is charged
on the amount at the dividend trust rate.
(4)
Otherwise, income tax is charged on the amount at the trust rate.
(5)
Income tax is not to be charged as mentioned in subsection (2) so far as the
45
amount—

Income Tax Bill
Part 9 — Special rules about settlements and trustees
Chapter 3 — Special rates for trustees’ income
255

(a)
is accumulated or discretionary income,
(b)
would be accumulated or discretionary income apart from section
480(3)(a) or (c), or
(c)
is income from property within subsection (6).
(6)
Property is within this subsection if it is held for the purposes of a
5
superannuation fund to which section 615(3) of ICTA (superannuation funds
relating to undertakings outside the UK) applies.
482
Types of amount to be charged at special rates for trustees

The types of amount referred to in section 481 are as follows.

10

Type 1

A payment—
(a)
which is made to the trustees or to which the trustees are entitled, and
(b)
which is made by a company on the redemption, repayment or
purchase of shares in the company or on the purchase of rights to
15
acquire such shares.


Type 2

Income treated as received by the trustees under section 714(2) or 716(3) of
ICTA (tax avoidance: transfers with or without accrued interest).
20


Type 3

Income treated as arising to the trustees under section 761(1) of ICTA (offshore
income gains).

25

Type 4

Income which the trustees are treated as receiving under section 68(2) or 71(4)
of FA 1989 (which relate to employee share ownership trusts).


Type 5
30

A sum to which Chapter 4 of Part 3 of ITTOIA 2005 (which provides for certain
amounts to be treated as receipts of a property business) applies.


Type 6

A profit in relation to which the trustees are liable for income tax under section
35
429 of ITTOIA 2005 (profits from deeply discounted securities).


Type 7

A gain in relation to which the trustees are liable for income tax under section
467 of ITTOIA 2005 (gains from contracts for life insurance etc), other than a
40
gain to which subsection (7) of that section applies.


Type 8

A profit or gain in relation to which the trustees are liable for income tax under
section 554 of ITTOIA 2005 (transactions in deposits).
45


Type 9

Income Tax Bill
Part 9 — Special rules about settlements and trustees
Chapter 4 — Trustees’ expenses and special rates for trustees
256


A profit or gain—
(a)
in relation to which the trustees are liable for income tax under section
557 of ITTOIA 2005 (disposals of futures and options), and
(b)
which does not meet any of conditions A to C in section 568 of ITTOIA
2005.
5


Type 10

Proceeds in relation to which the trustees are liable for income tax under
section 573 of ITTOIA 2005 (sales of foreign dividend coupons).

10

Type 11

Income treated as arising to the trustees under Chapter 3 of Part 12 of this Act
(tax avoidance: transactions in land).
483
Sums paid by personal representatives to trustees
(1)
This section applies if, during or at the end of the administration period for an
15
estate—
(a)
the personal representatives pay the trustees of a settlement a sum
representing income of the personal representatives, and
(b)
if this Chapter had applied to personal representatives, income tax
would have been charged on that income at the dividend trust rate or
20
at the trust rate.
(2)
The sum is treated as—
(a)
being paid as income, and
(b)
having borne income tax at the applicable rate.
(3)
In this section—
25
“administration period” has the meaning given by section 653 of ITTOIA
2005, and
“the applicable rate” means the rate referred to in section 663(1) of ITTOIA
2005 (the applicable rate for grossing up basic amounts of estate
income).
30
Chapter 4
Trustees’ expenses and special rates for trustees
484
Trustees’ expenses to be set against trustees’ trust rate income
(1)
This section applies if the trustees of a settlement incur allowable expenses in
a tax year (“the current tax year”).
35
(2)
The allowable expenses are to be set against the trustees’ trust rate income for
the current tax year in accordance with section 486.
(3)
That is to be done before working out whether section 491 applies in relation
to the trustees for the current tax year.
(4)
So far as any of the trustees’ trust rate income has an amount set against it in
40
accordance with section 486, income tax is charged on it at the rate or rates
which would apply apart from Chapter 3 (see Chapter 2 of Part 2).

Income Tax Bill
Part 9 — Special rules about settlements and trustees
Chapter 4 — Trustees’ expenses and special rates for trustees
257

(5)
Expenses are allowable for the purposes of this Chapter only so far as—
(a)
they are expenses of the trustees, and
(b)
they are properly chargeable to income, ignoring the express terms of
the settlement.
(6)
Expenses are not allowable for the purposes of this Chapter if they are
5
expenses which (apart from this section) have fallen, or may fall, to be taken
into account for the purpose of calculating the trustees’ liability to income tax
for any tax year.
485
Carry forward of unused expenses
(1)
This section applies if (apart from this section) the trustees incur an allowable
10
expense in a tax year prior to the current tax year (“the earlier tax year”).
(2)
For the purposes of this Chapter the trustees are treated as having incurred the
allowable expense in the current tax year so far as conditions A and B are met
in relation to the expense.
(3)
Condition A is that the allowable expense could not be set against the trustees’
15
trust rate income for the earlier tax year only because the trustees’ trust rate
income was insufficient or they had no trust rate income.
(4)
Condition B is that the allowable expense has not been set against the trustees’
trust rate income for a tax year prior to the current tax year as a result of this
section.
20
486
How allowable expenses are to be set against trust rate income
(1)
Take the following steps to determine how the allowable expenses are to be set
against the trustees’ trust rate income for the current tax year.


Step 1
25

Reduce the allowable expenses by the proportion of those expenses (if any)
which is excluded in accordance with section 487.

References at Steps 3 to 6 below to the allowable expenses are references to the
expenses as so reduced.

30

Step 2

Identify the type or types of income which make up the trust rate income.

The possible types are dividend income, savings income and other income.


Step 3
35

If there is dividend income within subsection (2)—
(a)
gross up by reference to the dividend ordinary rate so much of the
allowable expenses as is necessary to give a result equal to the amount
of that income, or
(b)
if there are not enough allowable expenses to give that result, gross
40
them all up by reference to that rate.

The grossed up amount is set against the dividend income within subsection
(2).


Step 4
45

Income Tax Bill
Part 9 — Special rules about settlements and trustees
Chapter 4 — Trustees’ expenses and special rates for trustees
258


If there are remaining expenses and there is dividend income not within
subsection (2)—
(a)
gross up by reference to the dividend ordinary rate so much of the
remaining expenses as is necessary to give a result equal to the amount
of that income, or
5
(b)
if there are not enough remaining expenses to give that result, gross
them all up by reference to that rate.

The grossed up amount is set against the dividend income not within
subsection (2).

For the purposes of this step “the remaining expenses” are the allowable
10
expenses so far as they have not been grossed up at Step 3.


Step 5

If there are remaining expenses and there is savings income—
(a)
gross up by reference to the savings rate so much of the remaining
15
expenses as is necessary to give a result equal to the amount of that
income, or
(b)
if there are not enough remaining expenses to give that result, gross
them all up by reference to that rate.

The grossed up amount is set against the savings income.
20

For the purposes of this step “the remaining expenses” are the allowable
expenses so far as they have not been grossed up at Step 3 or 4.


Step 6

If there are remaining expenses and there is other income—
25
(a)
gross up by reference to the basic rate so much of the remaining
expenses as is necessary to give a result equal to the amount of that
income, or
(b)
if there are not enough remaining expenses to give that result, gross
them all up by reference to that rate.
30

The grossed up amount is set against the other income.

For the purposes of this step “the remaining expenses” are the allowable
expenses so far as they have not been grossed up at Step 3, 4 or 5.
(2)
Income is within this subsection so far as it is—
(a)
chargeable under Chapter 3 of Part 4 of ITTOIA 2005 (dividends etc
35
from UK resident companies),
(b)
chargeable under Chapter 5 of that Part (stock dividends from UK
resident companies), or
(c)
chargeable under Chapter 6 of that Part (release of loan to participator
in close company).
40
487
Non-UK resident trustees
(1)
This section applies if a proportion of the income arising to the trustees in the
current tax year is untaxed income.
(2)
A proportion of the allowable expenses is excluded for the purposes of section
486.
45
(3)
That proportion is the same as the proportion of the income arising to the
trustees which is untaxed income.

Income Tax Bill
Part 9 — Special rules about settlements and trustees
Chapter 5 — Share incentive plans
259

(4)
For the purposes of this section the income arising to the trustees is untaxed
income so far as they are not liable to income tax on it wholly or partly because
they—
(a)
have been non-UK resident, or
(b)
have been treated as resident in a territory outside the United Kingdom
5
under double taxation arrangements.
(5)
If the income tax charged on the income arising to the trustees is limited under
Chapter 1 of Part 13 (limits on liability to income tax of non-UK residents), the
untaxed income includes so much of the income so arising which is
disregarded income (within the meaning of that Chapter) except so far as the
10
disregarded income is within subsection (6).
(6)
The disregarded income is within this subsection so far as—
(a)
sums representing income tax have been deducted from the income,
(b)
sums representing income tax have been treated as deducted from or
paid in respect of the income, or
15
(c)
there are tax credits in respect of the income.
Chapter 5
Share incentive plans
488
Application of section 479 to trustees of approved share incentive plans
(1)
This section applies if—
20
(a)
income arises to the trustees of an approved share incentive plan, and
(b)
the income consists of dividends or other distributions in respect of
shares held by the trustees in relation to which the requirements of Part
4 of Schedule 2 to ITEPA 2003 (approved share incentive plans: types of
shares that may be awarded) are met.
25
(2)
Section 479 applies in relation to the income only if and when condition A or
condition B has been met.
(3)
Condition A is that—
(a)
the applicable period in relation to the shares has ended, and
(b)
that period came to an end without the shares being awarded to a
30
participant in accordance with the plan.
(4)
Condition B is that the trustees disposed of the shares before the end of the
applicable period in relation to the shares.
(5)
For the purpose of determining whether shares are awarded to a participant
within the applicable period in relation to them, shares acquired by the trustees
35
at an earlier time are taken to be awarded to a participant before shares of the
same class acquired by the trustees at a later time.
(6)
References in this section to shares being awarded to a participant include
references to the shares being acquired on behalf of the participant as dividend
shares.
40