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 4 — Trustees’ expenses and special rates for trustees
258

(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
5
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
expenses as is necessary to give a result equal to the amount of that
10
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.

For the purposes of this step “the remaining expenses” are the allowable
15
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—
(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
20
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 other income.

For the purposes of this step “the remaining expenses” are the allowable
25
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
from UK resident companies),
(b)
chargeable under Chapter 5 of that Part (stock dividends from UK
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resident companies), or
(c)
chargeable under Chapter 6 of that Part (release of loan to participator
in close company).
(3)
If income tax would, apart from Chapter 3, be charged on any income
mentioned at Steps 3 to 6 at a rate different to the rate mentioned at the step in
35
question, for the purpose of setting any expenses against that income, gross up
the expenses by reference to the different rate instead of at the rate mentioned.
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.
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(2)
A proportion of the allowable expenses is excluded for the purposes of section
486.
(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 14 (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
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(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.
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(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
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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.
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Income Tax Bill
Part 9 — Special rules about settlements and trustees
Chapter 5 — Share incentive plans
260

489
“The applicable period” in relation to shares
(1)
This section sets out how the applicable period in relation to any shares (“the
relevant shares”) is determined for the purposes of section 488.
(2)
The length of the applicable period depends on whether any shares in the
relevant company were readily convertible assets at the time the relevant
5
shares were acquired by the trustees.
(3)
If any were, the applicable period is the period of two years beginning with the
acquisition date.
(4)
If none were, the applicable period is—
(a)
the period of 5 years beginning with the acquisition date, or
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(b)
if within that period any shares in the relevant company become
readily convertible assets, the period of two years beginning with the
date on which they did so,

whichever ends first.
(5)
Subsections (2) to (4) are subject to subsection (6).
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(6)
If the relevant shares were acquired by the trustees by virtue of a payment in
respect of which a deduction is allowed under paragraph 9 of Schedule 4AA to
ICTA (deduction for contribution to plan trust), the applicable period is the
period of 10 years beginning with the acquisition date.
(7)
In this section—
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“the acquisition date” means the date on which the trustees acquired the
relevant shares,
“readily convertible assets” has, subject to subsection (8), the meaning
given by sections 701 and 702 of ITEPA 2003, and
“the relevant company” means the company in which the relevant shares
25
are shares.
(8)
In determining for the purposes of this section whether shares are readily
convertible assets, ignore any market for the shares that—
(a)
is created by virtue of the trustees acquiring shares for the purposes of
the approved share incentive plan, and
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(b)
exists solely for the purposes of that plan.
490
Interpretation of Chapter
(1)
This Chapter forms part of the SIP code (see section 488 of ITEPA 2003
(approved share incentive plans)).
(2)
Therefore expressions used in this Chapter and contained in the index at the
35
end of Schedule 2 to ITEPA 2003 have the meaning indicated by that index.
(3)
For the purposes of this Chapter shares which are subject to provision for
forfeiture are treated as acquired by the trustees if and when the forfeiture
occurs.

Income Tax Bill
Part 9 — Special rules about settlements and trustees
Chapter 6 — Trustees’ first slice of trust rate income
261

Chapter 6
Trustees’ first slice of trust rate income
491
Special rates not to apply to first slice of trustees’ trust rate income
(1)
If the trust rate income for a tax year of the trustees of a settlement is £1,000 or
less, income tax is not charged on it at the dividend trust rate or at the trust rate.
5
(2)
If the trustees’ trust rate income is more than £1,000, income tax is not charged
on the first £1,000 of it at the dividend trust rate or at the trust rate.
(3)
Instead, income tax is charged on the trustees’ trust rate income or the first
£1,000 of it (as the case may be) at the rate or rates which would apply apart
from Chapter 3 (see Chapter 2 of Part 2).
10
(4)
For the purposes of subsection (2) apply the following rules in determining the
type or types of income that make up the first £1,000 of the trustees’ trust rate
income.
Rule 1

If the trustees’ trust rate income includes amounts on which income tax would
15
be charged at the basic rate apart from Chapter 3, treat those amounts as the
lowest part of the trust rate income.
Rule 2

If the trustees’ trust rate income includes amounts on which income tax would
be charged at the dividend ordinary rate apart from Chapter 3, treat those
20
amounts as the highest part of the trust rate income.
(5)
For the purposes of this section gains chargeable under Chapter 9 of Part 4 of
ITTOIA 2005 (gains from contracts for life assurance etc) are treated as if they
were savings income.
(6)
Amounts on which income tax is not to be charged at the dividend trust rate or
25
at the trust rate as a result of Chapter 4 are excluded from the trustees’ trust
rate income for the purposes of this section.
492
Cases where settlor has made more than one settlement
(1)
The application of section 491 in relation to the trustees of a settlement (“the
relevant settlement”) for a tax year is modified in accordance with subsection
30
(2) if the settlor in relation to the relevant settlement has made one or more
other current settlements.
(2)
References to £1,000 are to be read as references to—
(a)
£200, or
(b)
if greater, the settlor’s threshold amount.
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(3)
The settlor’s threshold amount is the amount calculated by dividing £1,000 by
the number of current settlements (including the relevant settlement) made by
the settlor.
(4)
If there is more than one settlor in relation to the relevant settlement—
(a)
calculate the threshold amount of each of them, and
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Income Tax Bill
Part 9 — Special rules about settlements and trustees
Chapter 7 — Discretionary payments
262

(b)
use the lowest of those threshold amounts for the purposes of
subsection (2)(b).
(5)
A settlement is current if it is in existence at a time during the tax year.
Chapter 7
Discretionary payments
5
493
Discretionary payments by trustees
(1)
Sections 494 and 495 apply for income tax purposes if—
(a)
in a tax year the trustees of a settlement make an annual payment to a
person (“the beneficiary”) in the exercise of a discretion (whether
exercisable by the trustees or any other person),
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(b)
the trustees are UK resident for the tax year, and
(c)
condition A or condition B is met.
(2)
Condition A is that what is paid to the beneficiary is, only because of the
payment, income of the beneficiary for income tax or corporation tax purposes.

“Income” does not include employment income.
15
(3)
Condition B is that the payment is treated for income tax purposes as the
income of a settlor under section 629 of ITTOIA 2005 (income paid to relevant
children of settlor).

“Settlor” is to be read in accordance with section 620 of ITTOIA 2005.
(4)
The payment is referred to in sections 494 and 495 as “the discretionary
20
payment”.
(5)
In this Chapter “payment” includes payment in money’s worth.
494
Grossing up of discretionary payment and payment of income tax
(1)
The discretionary payment is treated as if it were made after the deduction of
a sum representing income tax at the trust rate on the grossed up amount of the
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discretionary payment.
(2)
The grossed up amount of the discretionary payment is the actual amount of
the discretionary payment grossed up by reference to the trust rate.
(3)
The person mentioned in subsection (4) is treated as having paid income tax of
an amount equal to the sum deducted as mentioned in subsection (1).
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(4)
That person is—
(a)
if condition A in section 493 is met, the beneficiary, and
(b)
if condition B in section 493 is met, the settlor.
495
Statement about deduction of income tax
(1)
If the person who is treated as having paid income tax requests it in writing,
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the trustees must provide that person with a statement showing—
(a)
the grossed up amount of the discretionary payment,
(b)
the sum deducted as mentioned in section 494(1), and
(c)
the actual amount of the discretionary payment.

Income Tax Bill
Part 9 — Special rules about settlements and trustees
Chapter 7 — Discretionary payments
263

(2)
A statement under this section must be in writing.
(3)
The duty to comply with a request under this section is enforceable by the
person who made it.
496
Income tax charged on trustees
(1)
Income tax is charged for a tax year if—
5
(a)
in the tax year the trustees of a settlement make payments as a result of
which income tax is treated as having been paid under section 494, and
(b)
amount A is greater than amount B.
(2)
Amount A is the total amount of the income tax treated under section 494 as
having been paid.
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(3)
Amount B is the amount of the trustees’ tax pool available for the tax year (see
section 497).
(4)
The amount of the tax charged under this section is equal to the difference
between amounts A and B.
(5)
The trustees are liable for the tax.
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497
Calculation of trustees’ tax pool
(1)
Take the following steps to calculate the amount of the trustees’ tax pool
available for a tax year (“the current tax year”).

This is subject to subsections (2) and (3).
Step 1
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Take the amount of the trustees’ tax pool available for the previous tax year
and deduct from that amount (but not so that it goes below nil) the total
amount of income tax treated under section 494 as having been paid as a result
of payments made by the trustees in the previous tax year.
Step 2
25

Add together all amounts of income tax for which the trustees are liable for the
current tax year and which are of a type set out in section 498.
Step 3

Add the sum calculated at Step 2 to the amount resulting from Step 1.
(2)
If the trustees were non-UK resident for the previous tax year, references in
30
subsection (1) to the previous tax year are to be read as references to the last tax
year prior to the current tax year for which the trustees were UK resident.
(3)
If—
(a)
the current tax year is the tax year during which the settlement is
established, or
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(b)
the trustees have been UK resident for no tax year prior to the current
tax year,

ignore Steps 1 and 3 and, accordingly, the trustees’ tax pool available for the
current tax year is the sum calculated at Step 2.