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 2 — General provision about settlements and trustees
251

(3)
The cases covered by subsection (2) include cases where settled land (within
the meaning of the Settled Land Act 1925 (c. 18)) is vested in the tenant for life
and investments representing capital money are vested in the trustees of the
settlement.
475
Residence of trustees
5
(1)
This section applies for income tax purposes and explains how to work out, in
relation to the trustees of a settlement—
(a)
whether or not the single person mentioned in section 474(1) is UK
resident, and
(b)
whether or not that person is ordinarily UK resident.
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(2)
If at a time either condition A or condition B is met, then at that time the single
person is both UK resident and ordinarily UK resident.
(3)
If at a time neither condition A nor condition B is met, then at that time the
single person is both non-UK resident and not ordinarily UK resident.
(4)
Condition A is met at a time if, at that time, all the persons who are trustees of
15
the settlement are UK resident.
(5)
Condition B is met at a time if at that time—
(a)
at least one person who is a trustee of the settlement is UK resident and
at least one such person is non-UK resident, and
(b)
a settlor in relation to the settlement meets condition C (see section 476).
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(6)
If at a time a person (“T”) who is a trustee of the settlement acts as trustee in the
course of a business which T carries on in the United Kingdom through a
branch, agency or permanent establishment there, then for the purposes of
subsections (4) and (5) assume that T is UK resident at that time.
476
How to work out whether settlor meets condition C
25
(1)
This section applies for the purpose of working out whether a settlor (“S”) in
relation to a settlement meets condition C at a time.
(2)
If—
(a)
the settlement arose on S’s death (whether by S’s will, on S’s intestacy
or in any other way), and
30
(b)
immediately before S’s death, S was UK resident, ordinarily UK
resident or domiciled in the United Kingdom,

then S meets condition C from the time of S’s death until S ceases to be a settlor
in relation to the settlement.
(3)
If—
35
(a)
the settlement is not within subsection (2)(a), and
(b)
at a time when S made the settlement (or is treated for the purposes of
the Income Tax Acts as making the settlement), S was UK resident,
ordinarily UK resident or domiciled in the United Kingdom,

then S meets condition C from that time until S ceases to be a settlor in relation
40
to the settlement.
(4)
Further, if—
(a)
there is a transfer of property in relation to which section 471 applies,

Income Tax Bill
Part 9 — Special rules about settlements and trustees
Chapter 2 — General provision about settlements and trustees
252

(b)
S is a settlor in relation to settlement 2 as a result of that section, and
(c)
immediately before the disposal by the trustees of settlement 1, S meets
condition C as a settlor in relation to settlement 1 as a result of
subsection (2) or (3) or this subsection,

then S meets condition C as a settlor in relation to settlement 2 from the time S
5
becomes such a settlor until S ceases to be such a settlor.
(5)
“Settlement 1” and “settlement 2” are to be read in accordance with section
470(1).
Sub-funds
477
Sub-fund elections under Schedule 4ZA to TCGA 1992
10
(1)
This section applies for the purposes of the Income Tax Acts (except so far as,
in those Acts, the context otherwise requires) if the trustees of a settlement have
made a sub-fund election under paragraph 1 of Schedule 4ZA to TCGA 1992.
(2)
The sub-fund settlement is treated as a settlement that is created at the relevant
time.
15
(3)
Each trustee of the trusts on which property comprised in the sub-fund
settlement is held is treated as a trustee of the sub-fund settlement.
(4)
A person (“T”) who is a trustee of the sub-fund settlement is treated, from the
relevant time, as having ceased to be a trustee of the principal settlement unless
T is also a trustee of trusts on which property comprised in the principal
20
settlement is held.
(5)
A person (“T”) who is a trustee of the principal settlement is not to be treated
as a trustee of the sub-fund settlement unless T is also a trustee of trusts on
which property comprised in the sub-fund settlement is held.
(6)
The trustees of the sub-fund settlement are treated as having become, at the
25
relevant time, absolutely entitled to the property comprised in that settlement
as against the trustees of the principal settlement.
(7)
In this section—
“principal settlement” has the meaning given by paragraph 1 of Schedule
4ZA to TCGA 1992,
30
“the relevant time” means the time when the sub-fund election is treated
as having taken effect under paragraph 2 of that Schedule,
“sub-fund election” has the meaning given by paragraph 2 of that
Schedule, and
“sub-fund settlement” has the meaning given by paragraph 1 of that
35
Schedule.
Regulations
478
References to settled property etc in regulations
For the purposes of regulations (whenever made) made under a provision of
the Income Tax Acts—
40
(a)
references to settled property, a settlor or trustees are to be read in
accordance with this Chapter, and

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
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(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.
Type 1
10

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
acquire such shares.
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Type 2

Accrued income profits treated as made by the trustees under section 628(5) or
630(2).
Type 3

Income treated as arising to the trustees under section 761(1) of ICTA (offshore
20
income gains).
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
25

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
429 of ITTOIA 2005 (profits from deeply discounted securities).
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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
gain to which subsection (7) of that section applies.
Type 8
35

A profit or gain in relation to which the trustees are liable for income tax under
section 554 of ITTOIA 2005 (transactions in deposits).
Type 9

A profit or gain—
(a)
in relation to which the trustees are liable for income tax under section
40
557 of ITTOIA 2005 (disposals of futures and options), and

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

(b)
which does not meet any of conditions A to C in section 568 of ITTOIA
2005.
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).
5
Type 11

Income treated as arising to the trustees under Chapter 3 of Part 13 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
10
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
15
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—
20
“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).
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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”).
30
(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
35
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).
(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
40
the settlement.

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

(6)
Expenses are not allowable for the purposes of this Chapter if they are
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
5
(1)
This section applies if (apart from this section) the trustees incur an allowable
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.
10
(3)
Condition A is that the allowable expense could not be set against the trustees’
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
15
section.
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
20

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.
Step 2
25

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

If there is dividend income within subsection (2)—
(a)
gross up by reference to the dividend ordinary rate so much of the
30
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
them all up by reference to that rate.

The grossed up amount is set against the dividend income within subsection
35
(2).
Step 4

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
40
remaining expenses as is necessary to give a result equal to the amount
of that income, or