Income Tax Bill

House of Commons

Session 2006 - 07
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Other Bills before Parliament

Income Tax Bill

Income Tax Bill
Part 9 — Special rules about settlements and trustees
Chapter 1 — Introduction
244

(2)
The amount of the tax reduction is the difference between—
(a)
the amount of income tax payable by the person in respect of the
payment, and
(b)
the total amount of income tax which would have been payable by the
person in respect of the payment on the assumptions in subsection (3).
5
(3)
Those assumptions are that—
(a)
the payment was made in a number of equal instalments at yearly
intervals,
(b)
the last instalment was paid on the date on which the payment was in
fact made, and
10
(c)
the number of instalments was the same as the number of complete
years in the period over which the use of the patent extended, but
subject to a maximum of 6.
(4)
The tax reduction is given effect at Step 6 of the calculation in section 23.
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Part 9
Special rules about settlements and trustees
Chapter 1
Introduction
462
Overview of Part
20
(1)
This Part sets out special rules about settlements and trustees.
(2)
Chapter 2 contains general provision about settlements and trustees, for
example, definitions of expressions relating to settlements.
(3)
Chapter 3 provides for income tax to be charged at the dividend trust rate or at
the trust rate on certain amounts included in the net income of the trustees of
25
a settlement.
(4)
Chapter 4 provides—
(a)
for expenses of the trustees of a settlement to be set against the trustees’
trust rate income (see section 463(2)), and
(b)
consequentially, for the amount of the trust rate income to be reduced.
30
(5)
Chapter 5 qualifies section 479 (which is in Chapter 3) in the case of the trustees
of an approved share incentive plan.
(6)
Chapter 6 provides that the first slice of the trust rate income of the trustees of
a settlement is not to be charged at the dividend trust rate or at the trust rate.
(7)
Chapter 7 deals with the treatment of payments made by the trustees of a
35
settlement in the exercise of a discretion.

This affects the way the trustees and the recipients of such payments are taxed.
(8)
Chapter 8 deals with the treatment of expenses of the trustees of a settlement
where income arising to the trustees is, before being distributed, the income of
a person other than the trustees themselves.
40

This affects the way that other person is taxed on that income.

Income Tax Bill
Part 9 — Special rules about settlements and trustees
Chapter 2 — General provision about settlements and trustees
245

(9)
Chapter 9 deals with unauthorised unit trusts.
(10)
Chapter 10 deals with heritage maintenance settlements.
(11)
See also Part 10 for special rules about charitable trusts.
(12)
See also Chapter 4 of Part 2 of FA 2005 for provision about trusts with
vulnerable beneficiaries.
5
463
Interpretation of Part
(1)
In this Part—
“other income” means income which is neither dividend income nor
savings income, and
“the trustees of a settlement” does not include personal representatives.
10
(2)
References in this Part to the trust rate income for a tax year of the trustees of a
settlement are references to the trustees’ net income for the tax year so far as it
includes amounts on which income tax is charged at the dividend trust rate or
at the trust rate (ignoring Chapters 4 and 6).
464
Scottish trusts
15
(1)
This section applies if—
(a)
income arises to trustees under a trust having effect under the law of
Scotland,
(b)
the trustees are UK resident, and
(c)
a beneficiary under the trust (“B”) would have an equitable right in
20
possession to the income if the trust had effect under the law of England
and Wales.
(2)
B is treated for income tax purposes as having an equitable right in possession
to the income (even though B has no such right under the law of Scotland).
Chapter 2
25
General provision about settlements and trustees
Overview
465
Overview of Chapter and interpretation
(1)
This Chapter contains general provision about settlements and trustees.
(2)
Section 466 explains what is meant by references to settled property.
30
(3)
Sections 467 to 473 explain what is meant by references to a settlor in relation
to a settlement.
(4)
Sections 474 to 476 treat the trustees of a settlement as a single and distinct
person and set out rules in relation to the residence and ordinary residence of
that person.
35
(5)
Section 477 relates to sub-fund elections under paragraph 1 of Schedule 4ZA to
TCGA 1992.

Income Tax Bill
Part 9 — Special rules about settlements and trustees
Chapter 2 — General provision about settlements and trustees
246

(6)
Section 478 is about references to settled property etc in regulations.
(7)
For the purposes of this Chapter property is derived from other property if—
(a)
it derives (directly or indirectly and wholly or partly) from that other
property or any part of that other property, and
(b)
in particular, if it derives (directly or indirectly and wholly or partly)
5
from income from that other property or any part of that other
property.
(8)
In this Chapter “arrangements” includes any scheme, agreement or
understanding, whether or not legally enforceable.
Settled property
10
466
Meaning of “settled property” etc
(1)
This section applies for the purposes of the Income Tax Acts, except so far as,
in those Acts, the context otherwise requires.
(2)
“Settled property” means any property held in trust other than property
excluded by subsection (3).
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(3)
Property is excluded for the purposes of subsection (2) if—
(a)
it is held by a person as nominee for another person,
(b)
it is held by a person as trustee for another person who is absolutely
entitled to the property as against the trustee, or
(c)
it is held by a person as trustee for another person who would be
20
absolutely entitled to the property as against the trustee if that other
person were not an infant or otherwise lacking legal capacity.
(4)
References, however expressed, to property comprised in a settlement are
references to settled property.
(5)
A person is absolutely entitled to property as against a trustee if the person has
25
the exclusive right to direct how the property is to be dealt with (subject to the
trustees’ right to use the property for the payment of duty, taxes, costs or other
outgoings).
(6)
References to a person who is or would be so entitled include references to two
or more persons who are or would be jointly absolutely entitled as against the
30
trustee.
Settlors
467
Meaning of “settlor” etc
(1)
In the Income Tax Acts (except where the context otherwise requires) “settlor”,
in relation to a settlement, means the person, or any of the persons, who has
35
made the settlement.
(2)
In the Income Tax Acts (except where the context otherwise requires) a person
is a settlor of property if—
(a)
the property is settled property because of—
(i)
the person’s having made the settlement, or
40

Income Tax Bill
Part 9 — Special rules about settlements and trustees
Chapter 2 — General provision about settlements and trustees
247

(ii)
an event which leads to the person being treated by this Chapter
as having made the settlement, or
(b)
the property derives from settled property within paragraph (a).
(3)
A person (“S”) is treated for the purposes of the Income Tax Acts as having
made a settlement if—
5
(a)
S has made or entered into the settlement (directly or indirectly), or
(b)
the settled property, or property from which the settled property
derives, is or includes property within subsection (4).
(4)
Property is within this subsection if—
(a)
the settlement arose on S’s death (whether by S’s will, on S’s intestacy
10
or in any other way), and
(b)
immediately before S’s death, the property was property of S—
(i)
which was disposable property (see section 468), or
(ii)
which represented S’s severable share in any property to which
S was beneficially entitled as joint tenant.
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(5)
In particular, S is treated for the purposes of the Income Tax Acts as having
made a settlement if—
(a)
S has provided property for the purposes of the settlement (directly or
indirectly), or
(b)
S has undertaken to do that.
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(6)
If a person (“A”) makes or enters into a settlement in accordance with
reciprocal arrangements with another person (“B”)—
(a)
B is treated for the purposes of the Income Tax Acts as having made the
settlement, and
(b)
A is not to be treated for the purposes of the Income Tax Acts as having
25
made the settlement just because of the reciprocal arrangements.
(7)
This section needs to be read with sections 469 to 473.
(8)
This section and sections 469 to 473 do not apply for the purposes of Chapter 5
of Part 5 of ITTOIA 2005 (amounts treated as income of settlors).
468
Meaning of “disposable property”
30
(1)
This section applies for the purposes of section 467(4)(b)(i).
(2)
Property is disposable if S could have disposed of it by S’s will.
(3)
In working out whether any property could have been so disposed of—
(a)
make the assumptions mentioned in subsection (4), and
(b)
ignore the powers mentioned in subsection (5).
35
(4)
Assume that—
(a)
S is of full age and capacity,
(b)
the property is situated in England and Wales, and
(c)
if S is not domiciled in the United Kingdom, S is domiciled in England
and Wales.
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(5)
The powers to be ignored are—
(a)
any power of appointment giving S the right to dispose of the property,
and

Income Tax Bill
Part 9 — Special rules about settlements and trustees
Chapter 2 — General provision about settlements and trustees
248

(b)
any testamentary power conferred by statute to dispose of entailed
interests.
469
Person ceasing to be a settlor
(1)
A person (“S”) who is a settlor in relation to a settlement ceases to be so when
the following condition is met.
5
(2)
The condition is that—
(a)
no property of which S is the settlor is comprised in the settlement,
(b)
S has not undertaken to provide property (directly or indirectly) for the
purposes of the settlement in the future, and
(c)
S has not made reciprocal arrangements with another person for that
10
other person to enter into the settlement in the future.
470
Transfers between settlements
(1)
Section 471 applies in relation to a transfer of property from the trustees of one
settlement (“settlement 1”) to the trustees of another settlement (“settlement 2”)
if the transfer—
15
(a)
is not for full consideration,
(b)
is not by way of a bargain made at arm’s length, and
(c)
is not excluded by subsection (2).
(2)
A transfer of property is excluded for the purposes of subsection (1) if—
(a)
it occurs only because of the assignment by a beneficiary under
20
settlement 1 of an interest in that settlement to the trustees of settlement
2,
(b)
it occurs only because of the exercise of a general power of
appointment, or
(c)
section 473(4) applies in relation to it.
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(3)
In this section “transfer of property” means—
(a)
a disposal of property by the trustees of settlement 1, and
(b)
the acquisition by the trustees of settlement 2 of—
(i)
property disposed of by the trustees of settlement 1, or
(ii)
property created by the disposal.
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(4)
For the purposes of subsection (3) there is an acquisition or disposal of
property if there would be an acquisition or disposal of property for the
purposes of TCGA 1992.
471
Identification of settlor following transfer covered by section 470
(1)
If there is a transfer of property in relation to which this section applies, then
35
the following subsections apply for the purposes of the Income Tax Acts,
except so far as, in those Acts, the context otherwise requires.
(2)
The settlor (or each settlor) of the property disposed of by the trustees of
settlement 1 (“the disposed property”) is treated from the time of the disposal
as having made settlement 2.
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Income Tax Bill
Part 9 — Special rules about settlements and trustees
Chapter 2 — General provision about settlements and trustees
249

(3)
If there is more than one settlor of the disposed property, each of them is
treated in relation to settlement 2 as the settlor of a proportionate part of the
property acquired by the trustees of settlement 2 on the disposal.
(4)
So far as the disposed property—
(a)
was provided for the purposes of settlement 1, or
5
(b)
was derived from property so provided,

the property acquired by the trustees of settlement 2 on the disposal is treated
from the time of the disposal as having been provided for the purposes of
settlement 2.
(5)
If as a result of subsection (4), property (“the transferred property”) is treated
10
as having been provided for the purposes of settlement 2—
(a)
the person who provided the disposed property, or the property from
which it was derived, for the purposes of settlement 1 is treated as
having provided the transferred property for the purposes of
settlement 2, and
15
(b)
if more than one person provided the disposed property, or the
property from which it was derived, for the purposes of settlement 1,
each of them is treated as having provided a proportionate part of the
transferred property for the purposes of settlement 2.
472
Settlor where property becomes settled because of variation of will etc
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(1)
This section applies if—
(a)
a disposition of property following a person’s death is varied, and
(b)
section 62(6) of TCGA 1992 applies in relation to the variation.
(2)
If property becomes settled property because of the variation (and would not,
but for the variation, have become settled property), a person within
25
subsection (3) is treated for the purposes of the Income Tax Acts (except where
the context otherwise requires)—
(a)
as having made the settlement, and
(b)
as having provided the property for the purposes of the settlement.
(3)
The persons within this subsection are—
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(a)
a person who immediately before the variation was entitled to the
property, or to property from which it derived, absolutely as legatee,
(b)
a person who immediately before the variation would have been so
entitled if that person had not been an infant or otherwise lacking legal
capacity,
35
(c)
a person who, but for the variation, would have become so entitled, and
(d)
a person who, but for the variation, would have become so entitled if
that person had not been an infant or otherwise lacking legal capacity.
(4)
For the purposes of subsection (3)—
(a)
“legatee” includes a person taking property—
40
(i)
under a testamentary disposition or on an intestacy or partial
intestacy, whether beneficially or as trustee, or
(ii)
under a donatio mortis causa, and
(b)
a person who is a legatee as a result of paragraph (a)(ii) is treated as
acquiring the property when the donor dies.
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Income Tax Bill
Part 9 — Special rules about settlements and trustees
Chapter 2 — General provision about settlements and trustees
250

(5)
For the purposes of subsection (4)(a) property taken under a testamentary
disposition or on an intestacy or partial intestacy includes any property
appropriated by the personal representatives in or towards satisfaction of—
(a)
a pecuniary legacy, or
(b)
any other interest or share in the property devolving under the
5
disposition or intestacy.
473
Deceased person as settlor where variation of will etc
(1)
This section applies if—
(a)
a disposition of property following the death of a person (“D”) is
varied, and
10
(b)
section 62(6) of TCGA 1992 applies in relation to the variation.
(2)
If—
(a)
property would have become comprised in a settlement within
subsection (3), but
(b)
as a result of the variation, the property, or property derived from it,
15
becomes comprised in another settlement,

D is treated for the purposes of the Income Tax Acts (except where the context
otherwise requires) as having made the other settlement.
(3)
A settlement is within this subsection if—
(a)
it arose on D’s death (whether by D’s will or on D’s intestacy or in any
20
other way), or
(b)
it was in existence immediately before D’s death (whether or not D was
a settlor in relation to it).
(4)
If—
(a)
immediately before the variation property is comprised in a settlement
25
and is property of which D is a settlor, and
(b)
immediately after the variation the property, or property derived from
it, becomes comprised in another settlement,

D is treated for the purposes of the Income Tax Acts (except where the context
otherwise requires) as having made the other settlement.
30
(5)
A settlement treated as made by D as a result of this section is treated for the
purposes of the Income Tax Acts as made by D immediately before D’s death.
(6)
But subsection (5) does not apply in relation to a settlement which arose on D’s
death.
Trustees
35
474
Trustees of settlement to be treated as a single and distinct person
(1)
For the purposes of the Income Tax Acts (except where the context otherwise
requires), the trustees of a settlement are together treated as if they were a
single person (distinct from the persons who are the trustees of the settlement
from time to time).
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(2)
If different parts of the settled property in relation to a settlement are vested in
different bodies of trustees, subsection (1) and sections 475 and 476 apply in
relation to the different bodies as if they were all one body.