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Clause 510: Sums applied for property maintenance purposes
1529. This clause addresses a particular issue where an election under clause 508 has not been made, and so the income for the year is taxable on the settlor. It is based on section 691(3) of ICTA.
1530. The issue is the treatment of any sum applied for a property maintenance purpose that exceeds the income for the year. Such a sum may already have been taxed on the trustees or the settlor in past years, but it may also be subject to a charge to income tax for one or other of the reasons referred to in subsection (2).
1531. This clause cancels such a charge to tax on the excess. The result is that all the income of the HMS for the year is taxable on the settlor solely under Chapter 5 of Part 5 of ITTOIA. There is no other charge on any sum in excess of that income to the extent that the excess is applied for a property maintenance purpose.
Clause 511: Prevention of double taxation: reimbursement of settlor
1532. This clause prevents a double charge to income tax that may arise if the settlor is carrying on a trade. It is based on section 692 of ICTA.
1533. The source legislation (section 692(1) of ICTA) refers to expenditure that "is (or would apart from the reimbursement be) deductible in computing .. profits". The bracketed words have been omitted from subsection (1)(c) because the amount "reimbursed" is, strictly, income of the business that is ignored in computing profits. It does not cancel the "real" expenditure, which in principle remains allowable.
Clause 512: Charge to tax on some settlements
1534. This clause makes provision for a charge to income tax on income arising to the trustees in a number of circumstances. It is based on section 694(1) and (5) of ICTA.
1535. Most of the circumstances involved (cases A to C) involve a breach of the main IHTA conditions.
1536. But no charge will arise under this clause if the settlor has already been charged on the income as trust income: see clause 517. This charge can, therefore, only arise if an election under clause 508 has been made.
1537. Case D is an anti-avoidance provision to guard against loss of tax if a non-heritage beneficiary with a reversionary interest in property comprised in the HMS sells that interest to another heritage body (H1).
1538. The charge under this Chapter would not ordinarily arise when the property leaves the HMS on reversion, because the recipient is a heritage body or a charity. But the non-heritage person would have effectively obtained money from the heritage property.
1539. So it is provided that if, earlier or at the time, H1 (or any other heritage body) has paid monetary consideration for any interest under the settlement, a charge on the trustees will arise. But if H1 has acquired the interest from another heritage body, there is no charge.
Clause 513: Income charged
1540. This clause sets out the measure of the income to be charged to tax under clause 512. It is based on section 694(2) and (4) of ICTA.
1541. Other than income applied for a property maintenance purpose or for the benefit of a heritage body, the charge is on all the income that has arisen from the time the HMS came into being to the occasion of charge. But if there has been a previous charge to tax under clause 512, the period over which income is measured starts from the date of that previous occasion of charge. There is no credit for any other tax charge on any part of the income that has arisen over the relevant period.
Clause 514: Persons liable
1542. This clause provides that the persons liable for the tax under clause 512 are the trustees of the HMS. It is based on section 694(4) of ICTA.
Clause 515: Rate of tax
1543. This clause sets out the rate at which the income charged under clause 512 is to be taxed. It is based on clause 694(2A) of ICTA.
1544. That rate of tax is arrived at by subtracting the trust rate from the higher rate of income tax. This applies to income of all types, including dividend income.
1545. In the particular case of dividend income, the provision does not seek to reinstate the effect of charging the settlor instead of the trustee. (Dividend income would generally be charged on an individual at the dividend upper rate, and on the trustees of the HMS at the dividend trust rate. But the difference between these rates is not necessarily the same as that between the rates referred to by this clause.)
1546. From the tax year 2004-05 onwards, the trust rate has been aligned with the higher rate. So, at present, there can be no charge under clause 512. But the situation could change in the future.
Clause 516: Transfer of property between settlements
1547. This clause addresses occasions when heritage maintenance property leaves the HMS and becomes comprised in another settlement either:
It is based on section 694(6) and (7) of ICTA.
1548. The "default rule" is that inheritance tax is charged when property leaves an HMS (paragraph 8 of Schedule 4 to IHTA).
1549. But no such charge arises if, within 30 days of the property leaving the HMS, it becomes comprised in another HMS. This is because the exemption for transfers into an HMS overrules the charge when the property leaves an HMS (paragraph 9(1) and (2) of Schedule 4 to IHTA). The only exception to this is when the value of the property leaving the first HMS is greater than its value on entering the second. In that case, inheritance tax is charged on the excess (paragraph 9(4) of Schedule 4 to IHTA). But that charge is ignored in considering the effect of this clause (see the words in brackets in subsection (4)(a)).
1550. In some circumstances, a charge to income tax under clause 512 could still arise, there being, for example, no 30-day "permitted period" in Case B set out in clause 512 to match the "permitted period" in the inheritance tax provision.
1551. Subsection (2) ensures that no charge to income tax arises at the time of the transfer of the property if the transfer is also exempt for inheritance tax purposes, or if the property transferred remains heritage property throughout. Instead, the amount chargeable to income tax is deferred and added to any income taxable on the trustees of the later HMS if an occasion of charge occurs.
1552. Accordingly, subsection (3) determines the period over which the income to be charged is measured, applying the following modifications to the provisions in clause 513:
1553. The result is that any income of any earlier HMS (however many tax-free transfers have occurred) will be charged on the chargeable settlement to the extent that it has not been subject to this charge already.
Clause 517: Exemption for income treated as income of settlor
1554. This clause excludes from the charge to income tax under clause 512 income of the trustees that is treated as income of the settlor. It is based on clause 694(3) of ICTA.
Part 10: Special rules about charitable trusts etc
1555. This Part contains rules specific to charitable trusts. It is based mainly on sections 505 to 506C of, and Schedule 20 to ICTA, section 25 of FA 1990 and section 46 of FA 2000.
Clause 518: Overview of Part
1556. This clause sets out the scope of the Part and provides signposts to rules about the tax treatment of gifts made to charitable trusts, exemptions from charges to tax under ICTA or ITTOIA, and the restrictions on when exemptions can apply. It is new.
1557. The exemptions for various types of income received by charitable trusts are set out following (so far as relevant) the order in which the types of income concerned are set out in ITTOIA. This order is also followed in Part 4 of this Bill (loss relief).
1558. The exemptions are effected by saying that the "income is not taken into account in calculating total income". The expression "no liability to income tax arises" (used in Part 6 of ITTOIA, where it is supported by section 783(1) of that Act) would go too far in relation to the exemptions provided in this Part as it may be necessary to have regard to the income for certain income tax purposes.
Clause 519: Meaning of "charitable trust"
1559. This clause defines "charitable trust" for the purposes of this Part. It is based on section 506(1) of ICTA.
1560. The effect of splitting the source legislation between income tax and corporation tax is that the income tax rules apply only to charities constituted in the form of trusts. Schedule 1 to this Bill accordingly makes appropriate consequential amendments to the rules (eg in ICTA) relating to charitable companies.
1561. The definition of charitable trust does not include anything coming within the definition of "company" in section 832(1) of ICTA, so charities constituted as unincorporated associations and charities incorporated by Royal Charter are excluded from the definition of "charitable trust".
Clause 520: Gifts entitling donor to gift aid relief: income tax treated as paid
1562. This clause specifies that charitable trusts receiving gift aid donations from individuals are treated as receiving a grossed up amount, and that the tax treated as deducted from the gift is treated as paid by the charitable trust. It is based on section 25(10) and (12) of FA 1990.
1563. This paves the way for clause 521. In particular, it is what enables charitable trusts to recover income tax treated as deducted by individual donors in cases where the gift is chargeable but exempt (which is normally the case). It also means that, in a case where the gift is chargeable and not exempt, that this income tax is available to be set against any liability.
Clause 521: Gifts entitling donor to gift aid relief: income tax liability and exemption
1564. This clause sets out the charge to tax that can arise on gift aid payments received by a charitable trust. It is based on section 505(1) of ICTA and section 25(10) and (12) of FA 1990.
1565. This clause imposes a freestanding charge to income tax on gift aid payments, unlike the source legislation which operated by treating the gifts as annual payments. It also sets out the exemption which will normally apply if the charitable trust uses the gifts for charitable purposes.
Clause 522: Gifts of money from companies: income tax liability and exemption
1566. This clause sets out the charge to tax that can arise on gifts made by companies to a charitable trust. It is based on section 339(4) of ICTA.
1567. This clause imposes a freestanding charge to income tax on gifts, unlike the source legislation which operated by treating the gifts as annual payments. It also sets out the exemption which will normally apply if the charitable trust uses the gifts for charitable purposes.
1568. Companies have no obligation to deduct income from qualifying donations (as defined in section 339 of ICTA), which are treated as charges on income. This clause, like the source legislation, is silent about the consequences of the payment of a gift which is not a qualifying donation by a company to a charitable trust.
Clause 523: Payments from other charities: income tax liability and exemption
1569. This clause imposes a charge to tax on certain payments made by a charity to a charitable trust, to prevent charities avoiding the operation of the restrictions on exemptions by routing non-charitable expenditure through other charities. It is based on section 505(1) to (2) of ICTA.
1570. This clause imposes a freestanding charge to income tax on payments, unlike the source legislation which operated by treating the payments as annual payments. It also sets out the exemption which will normally apply if the charitable trust uses the payments for charitable purposes.
1571. Subsection (6) makes it clear that clause 494, which is based on section 687 of ICTA and deals with the grossing up of discretionary payments from trusts, takes precedence over this clause where applicable.
Clause 524: Exemption for profits etc of charitable trades
1572. This clause sets out the exemption for trading profits of charitable trusts. It is based on section 505(1) of ICTA.
1573. The exemption applies only if the trade is a charitable trade. This is defined in clause 525.
1574. This clause makes it clear that adjustment income (arising from a charitable trade) is exempt, in line with practice. Adjustment income is defined by reference to ITTOIA. See Change 92 in Annex 1.
1575. This clause also makes it clear that post-cessation receipts (arising from what was a charitable trade) are exempt, in line with practice. Post-cessation receipt is defined by reference to ITTOIA. See Change 92 in Annex 1.
1576. Change 92 also affects clauses 525, 526, 531 and 539.
1577. Exemptions for "small-scale trades" are dealt with separately in clause 526.
Clause 525: Meaning of "charitable trade"
1578. This clause defines the meaning of "charitable trade" for the purposes of the previous clause. It is based on section 505(1) and (1B) of ICTA.
1579. The main rule, in subsection (1), is that the trade must be exercised in the course of carrying out a primary purpose trade of the charitable trust, ie that it must form part of the primary purposes of the trust, as set out in the trust deed or other governing document. Or that the work in connection with the trade must be mainly carried on by beneficiaries of the charitable trust.
1580. The source legislation in section 505(1)(e) of ICTA referred to the trade being carried on "in the United Kingdom or elsewhere", and section 505(1)(e)(i) referred to it being exercised in the "actual" carrying out of a primary purpose. The words in inverted commas have been omitted as they add nothing.
1581. Subsection (4), about making apportionments where different trades are treated as separate trades, makes specific mention of adjustment income and post-cessation receipts. See Change 92 in Annex 1 and the commentary on clause 524.
1582. Any apportionments must be "just" as well as "reasonable", as in the source legislation. See Change 93 in Annex 1.
Clause 526: Exemption for profits etc of small-scale trades
1583. This clause provides an exemption for trading income, adjustment income and post-cessation receipts in circumstances where the amount of income which can be exempted under this clause and the next is "small", and provided the income is applied to the purposes of the charitable trust. It is based on section 46 of FA 2000.
1584. The exemption provided by this clause applies only if the income is not otherwise exempt. So profits from primary purpose trading (including related adjustment income and post-cessation receipts) are exempt under clause 524, whereas profits from a non-primary purpose trading activity (including related adjustment income and post-cessation receipts) may be exempt under this clause.
1585. The clause provides a statutory exemption for adjustment income. See Change 92 in Annex 1 and the commentary on clause 524.
1586. The source legislation restricted the exemption to income from trades carried on wholly or partly in the United Kingdom. This restriction has been dropped. See Change 94 in Annex 1.
1587. The condition about the level of the income is in clause 528.
Clause 527: Exemption from charges under provisions to which section 950 applies
1588. This clause provides an exemption for certain miscellaneous income and gains arising to a charitable trust and applied to the purposes of the charitable trust. It is based on section 46 of FA 2000.
1589. The types of miscellaneous income and gains which can come within the terms of this exemption are defined by reference to clause 950. They are broadly those items which were Schedule D Case VI income before the enactment of ITTOIA.
1590. Subsection (2) specifies particular types of income and gains which cannot benefit from the exemption.
1591. The exemption provided by this clause only applies if the income or gains are not otherwise exempt. So, for example, post-cessation primary purpose trading receipts and interest are exempt under clauses 524 and 532 respectively and post-cessation trading receipts from a non-primary purpose trading activity are exempt under clause 526. But profits from the disposal of know-how or the sale of patent rights may be exempt under this clause.
1592. The condition about the level of the income and gains is in clause 528.
Clause 528: Condition as to trading and miscellaneous incoming resources
1593. This clause sets out the condition about the level of trading and miscellaneous incoming resources that has to be met if the exemptions in clauses 526 or 527 are to be available. It is based on section 46 of FA 2000.
1594. The condition operates by reference to the incoming resources associated with the trading activity and miscellaneous transactions whose profits are not exempt under clauses 524, 529, 530, 531 or 536. The expression "incoming resources" is used instead of "gross income" because this accounting term is a more direct and accessible way of capturing the meaning of the income labelled "gross income" in the source legislation. There are also related points of clarification. See Change 94 in Annex 1.
1595. Trading incoming resources and miscellaneous incoming resources are defined in subsections (2) and (4) respectively. Incoming resources relating to trading activities are determined for a basis period for a tax year, since the profits (or losses) of the trade are taxable by reference to basis periods. Incoming resources relating to miscellaneous transactions, and to other non-trading items or activities, are determined by reference to tax years.
1596. The requisite limit is given in subsection (6).
1597. Where basis periods or tax years do not correspond to periods of account, incoming resources are to be apportioned on a time basis, or on any other basis that is reasonable in the circumstances. For the purpose of the comparison required in subsection (6)(a), the total incoming resources for a tax year comprise the incoming resources from trading activities for the relevant basis period for the tax year and the incoming resources from all other sources for the tax year.
Clause 529: Exemption for profits from fund-raising events
1598. This clause gives statutory effect to ESC C4 as it applies to charitable trusts and provided the profits are applied to the purposes of the charitable trust. It is new.
1599. The ESC deals with fund-raising events arranged by voluntary organisations or charities and applies if the profits are transferred to charities or otherwise applied for charitable purposes. In the context of charitable trusts, any such transfer or application would have to fall within the scope of the overall purposes of the trust.
1600. The fund-raising event has to fall within the exemption from VAT under Group 12 of Schedule 9 to the Value Added Tax Act 1994. That Schedule provides an exemption from VAT for the supply by a charity of goods and services in connection with an event that is organised primarily to raise money for itself or other charities. The Schedule defines "event" and places certain limits on the number of events that a charity can hold in the same location in any given year.
1601. See Change 95 in Annex 1. This change also affects clause 539.
Clause 530: Exemption for profits from lotteries
1602. This clause provides an exemption for lottery income provided the income is applied to the purposes of the charitable trust. It is based on section 505(1) of ICTA.
Clause 531: Exemption for property income etc
1603. This clause sets out the exemption from income tax for property income and certain trading income arising from land, provided the income is applied to charitable purposes. It is based on section 505(1) of ICTA.
1604. The exemption applies where income is chargeable to tax under Part 2 of ITTOIA as a result of section 261 of that Act, and provided the income is applied to charitable purposes.
1605. Income chargeable to tax under Part 2 of ITTOIA means profits of a trade, adjustment income and post-cessation receipts. This means that the clause includes an exemption for adjustment income, and for post-cessation receipts, in line with practice. See Change 92 in Annex 1 and the commentary on clause 524.
1606. There is no requirement for the trade to be exercised in the course of carrying on a primary purpose of the charitable trust. But subsection (1) specifies that the income must be chargeable under Part 2 of ITTOIA, rather than Part 3, as a result of section 261 of that Act.
1607. This makes the effect of the source legislation in section 505(1)(a) of ICTA, as amended by ITTOIA, explicit. There is no other income arising from land and chargeable to tax under Part 2 of ITTOIA which is exempt under that provision.
1608. The exemption also refers to Part 3 of ITTOIA, rather than referring to profits or gains arising in respect of rents or other receipts from an estate, interest or right in or over land, to reflect the fact that such income is charged by ITTOIA as the profits of a property business.
1609. The reference to Part 3 of ITTOIA means that the clause provides an exemption from income tax for adjustment income of UK property businesses, provided the income is applied to charitable purposes. See Change 92 in Annex 1. See also the commentary on clause 524.
1610. The reference to Part 3 of ITTOIA also makes it explicit that the clause provides an exemption from income tax for post-cessation receipts of UK property businesses, provided the income is applied to charitable purposes.
1611. Subsection (2)(b) requires that the estate, interest or right in or over land is vested in a person in trust for a charitable trust or for charitable purposes. A charitable trust has no legal personality and cannot hold land itself, so the land "belonging" to a charitable trust must be vested in the names of the trustees, or of another person (eg a nominee for the trustees). Hence the reference to the estate, interest or right being vested in any person.
1612. The exemption applies where the income derives from land vested in trust for a charitable trust or for charitable purposes. But if some of the land is vested in trust for charitable purposes and some vested or held for other purposes (for example, as an investment to generate income for non-charitable purposes) it is necessary to allocate the profits of the single property business between the two parts. This reflects the approach of the exemption in the source legislation that looked to particular interests in land, rather than to one overall property business.
Clause 532: Exemption for savings and investment income
1613. This clause sets out the various categories of savings and investment income that qualify for exemption from income tax, provided the income is applied to charitable purposes. It is based on section 505(1) of ICTA.
1614. The precise terms of the clause draw significantly on the consequential amendments made to section 505 of ICTA by ITTOIA.
1615. In subsection (1), the reference to Act includes references to Acts of the Scottish Parliament and Northern Ireland legislation. See Change 145 in Annex 1, clause 952 and the commentary on that clause.
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