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 8 — Trustees’ expenses and beneficiary’s income
264

498
Types of income tax for the purposes of section 497
(1)
The types of amount referred to at Step 2 in section 497 are as follows.
Type 1

The amount of any tax on income (other than income of a kind mentioned
below in relation to Type 2 or 3) charged at the dividend trust rate or at the trust
5
rate.
Type 2

The amount of tax at the nominal rate on any income which is—
(a)
chargeable under Chapter 3 of Part 4 of ITTOIA 2005 (dividends etc
from UK resident companies),
10
(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),

and on which tax is charged at the dividend trust rate as a result of section 479.
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Type 3

The amount of tax at the nominal rate on any income on which tax is charged
at the dividend trust rate as a result of section 481.
Type 4

The amount of any tax on income on which tax is charged at the basic rate or
20
at the savings rate as a result of section 491.
Type 5

The amount of tax on any income determined in accordance with section 26 of
FA 2005 (special tax treatment for trusts for the benefit of vulnerable persons).
(2)
In relation to Types 2 and 3, references to the nominal rate are references to a
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rate equal to the difference between the dividend trust rate and the dividend
ordinary rate.
(3)
In relation to Types 1 to 4, references to income do not include income the tax
on which is reduced in accordance with section 26 of FA 2005.
Chapter 8
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Trustees’ expenses and beneficiary’s income
499
Application of Chapter
(1)
This Chapter applies if—
(a)
in a tax year (“the current tax year”) income arises to the trustees of a
settlement, and
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(b)
before being distributed, some or all of that income is income of another
person (“the beneficiary”).
(2)
It contains provision about how the beneficiary’s income mentioned in
subsection (1)(b) (“the beneficiary’s income”) can be reduced for income tax
purposes by reference to expenses of the trustees.
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Income Tax Bill
Part 9 — Special rules about settlements and trustees
Chapter 8 — Trustees’ expenses and beneficiary’s income
265

500
Restrictions on use of trustees’ expenses to reduce the beneficiary’s income
(1)
Expenses of the trustees can be used to reduce the beneficiary’s income for
income tax purposes only so far as—
(a)
the expenses are incurred by the trustees in the current tax year or in an
earlier tax year, and
5
(b)
as a result of the expenses being chargeable to income as mentioned in
subsection (2) or (3), the beneficiary’s entitlement to the beneficiary’s
income is reduced by reference to the expenses.
(2)
Expenses are chargeable to income for the purposes of subsection (1)(b) if they
are chargeable to income by the trustees under a term of the settlement (subject
10
to any overriding law which prevents the expenses from being so chargeable).
(3)
Expenses are also chargeable to income for the purposes of subsection (1)(b) if
they—
(a)
are not chargeable to income by the trustees under a term of the
settlement, but
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(b)
are chargeable to income by the trustees in accordance with any law
(subject to any overriding term of the settlement which prevents the
expenses from being so chargeable).
(4)
Expenses cannot be used to reduce the beneficiary’s income for income tax
purposes so far as they are expenses which have fallen, or may fall, to be taken
20
into account for the purpose of calculating the trustees’ liability to income tax
for any tax year.
501
Non-UK resident beneficiaries
(1)
This section applies if—
(a)
expenses of the trustees are to be used to reduce the beneficiary’s
25
income for income tax purposes, and
(b)
a proportion of the beneficiary’s income is untaxed income (see section
502).
(2)
A proportion of those expenses is not to be so used.
(3)
That proportion is the same as the proportion of the beneficiary’s income
30
which is untaxed income.
(4)
In subsection (3) the references to the beneficiary’s income and untaxed income
do not, in either case, include so much (if any) of that income as is equal to the
amount of income tax, or of any foreign tax, for which the trustees are liable on
that income.
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(5)
“Foreign tax” means any tax which—
(a)
is of a similar character to income tax, and
(b)
is imposed by the laws of a territory outside the United Kingdom.
502
Meaning of “untaxed income” in section 501
(1)
For the purposes of section 501 the beneficiary’s income is untaxed income so
40
far as the beneficiary is not liable to income tax on it wholly or partly because
the beneficiary—
(a)
has been non-UK resident, or

Income Tax Bill
Part 9 — Special rules about settlements and trustees
Chapter 8 — Trustees’ expenses and beneficiary’s income
266

(b)
has been treated as resident in a territory outside the United Kingdom
under double taxation arrangements.
(2)
If the income tax charged on the beneficiary for the beneficiary’s income 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 beneficiary’s income
5
which is disregarded income (within the meaning of that Chapter) except so far
as the disregarded income is within subsection (3).
(3)
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
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paid in respect of the income, or
(c)
there are tax credits in respect of the income.
503
How beneficiary’s income is reduced
(1)
This section applies if the beneficiary’s income is to be reduced for income tax
purposes by expenses of the trustees.
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(2)
The beneficiary’s income is to be reduced in the following order—

first, reduce dividend income within subsection (3) (if any),

second, reduce dividend income not within that subsection (if any),

third, reduce savings income (if any), and

fourth, reduce other income (if any).
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(3)
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
resident companies), or
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(c)
chargeable under Chapter 6 of that Part (release of loan to participator
in close company).
(4)
If the trustees are liable for income tax charged on a component of the
beneficiary’s income at a particular rate, then any reduction of that component
is to be made in accordance with the steps set out in subsection (5).
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(5)
Here are the steps.
Step 1

Deduct from the component the amount of income tax charged on it at the
particular rate for which the trustees are liable.
Step 2
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Take the result from Step 1 and reduce it (but not below nil) by the amount of
the trustees’ expenses so far as they have not already been used to reduce other
components of the beneficiary’s income.
Step 3

Take the result from Step 2 and gross it up by reference to the particular rate.
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The result is the reduced amount of the component of the beneficiary’s income.

Income Tax Bill
Part 9 — Special rules about settlements and trustees
Chapter 9 — Unauthorised unit trusts
267

Chapter 9
Unauthorised unit trusts
504
Treatment of income of unauthorised unit trust
(1)
This section applies for income tax purposes in relation to an unauthorised unit
trust if the trustees are UK resident.
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(2)
If income arises to the trustees, the income is treated as the income of the
trustees and not of the unit holders.
(3)
If income tax on any part of the income would apart from this subsection be
charged at the dividend ordinary rate or at the savings rate, income tax on that
part of the income is charged at the basic rate instead.
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(4)
None of the following applies in relation to the income—
(a)
section 479,
(b)
section 397(1) of ITTOIA 2005 (tax credits for qualifying distributions),
(c)
section 399(2) and (6) of ITTOIA 2005 (person not entitled to tax credit
treated as having paid income tax), and
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(d)
section 400(2) and (3) of ITTOIA 2005 (person whose income includes
non-qualifying distribution treated as having paid income tax).
(5)
Sections 494 and 495 do not apply in relation to payments made by the trustees.
505
Relief for trustees of unauthorised unit trust
(1)
This section applies if in a tax year the trustees of an unauthorised unit trust are
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treated as making a deemed payment.
(2)
The trustees are entitled to a relief for the tax year equal to the gross amount of
the payment.
(3)
The relief is given by deducting that gross amount in calculating the trustees’
net income for the tax year (see Step 2 of the calculation in section 23).
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(4)
But this is subject to subsections (5) to (7) and section 506.
(5)
Relief is not to be given for the payment so far as it is ineligible for relief.
(6)
For the purpose of determining the extent to which the payment is ineligible
for relief (if at all) section 450 applies in relation to the payment as that section
applies in relation to a payment to which section 449 applies.
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(7)
The total amount of the reliefs given under this section to the trustees for the
tax year cannot be greater than the amount of the trustees’ modified net income
for the tax year (see section 1025).
(8)
In this section and in section 506 “deemed payment” and “the gross amount”
have the meanings given by section 941(6).
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506
Special rules for trustees affected by section 733 of ICTA
(1)
This section applies if—
(a)
interest payable to the trustees of an unauthorised unit trust in respect
of securities (“the affected income”) is attributable to a tax year,

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Part 9 — Special rules about settlements and trustees
Chapter 10 — Heritage maintenance settlements
268

(b)
because of section 733(1) of ICTA (dividend buying etc: persons
entitled to exemptions), some part of the affected income is not exempt
from income tax, and
(c)
the trustees are treated as making deemed payments in the tax year.
(2)
For the purposes of section 505(7) the trustees’ modified net income for the tax
5
year is reduced by the amount of the affected income.
(3)
In this section “interest” and “securities” are to be read in accordance with
section 731(9) of ICTA.
Chapter 10
Heritage maintenance settlements
10
Introduction
507
Overview of Chapter
(1)
This Chapter makes provision about income arising from heritage
maintenance property comprised in a heritage maintenance settlement.
(2)
In this Chapter—
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“heritage body” means a body or charity of a kind mentioned in
paragraph 3(1)(a)(ii) of Schedule 4 to IHTA 1984 (maintenance funds
for historic buildings etc),
“heritage direction” means a direction under paragraph 1 of that
Schedule,
20
“heritage maintenance property” means any property in respect of which
a heritage direction has effect,
“heritage maintenance settlement” means a settlement which comprises
heritage maintenance property, and
“property maintenance purpose” means any of the purposes mentioned
25
in paragraph 3(1)(a)(i) of that Schedule.
(3)
If a settlement comprises both heritage maintenance property and other
property, the heritage maintenance property and the other property are treated
as comprised in separate settlements for the purposes of Chapters 2 to 8 of this
Part and the following provisions—
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(a)
sections 64 to 66 and sections 75 to 79 (trade loss relief against general
income),
(b)
sections 83 to 88 (carry-forward trade loss relief), and
(c)
Chapter 5 of Part 5 of ITTOIA 2005.
Trustees’ election in respect of income etc
35
508
Election by trustees
(1)
The trustees of a heritage maintenance settlement may elect for this section to
have effect for a tax year.
(2)
If an election under subsection (1) has effect for a tax year, the rules in
subsections (3) and (4) apply.
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Income Tax Bill
Part 9 — Special rules about settlements and trustees
Chapter 10 — Heritage maintenance settlements
269

(3)
Income arising in the year from the heritage maintenance property comprised
in the settlement, which would otherwise be treated as income of the settlor
under Chapter 5 of Part 5 of ITTOIA 2005, is not to be so treated.
(4)
Any sum applied out of the heritage maintenance property in the year for a
property maintenance purpose, which would otherwise be treated for income
5
tax purposes as the income of a person—
(a)
because of the person’s interest in (or occupation of) the property in
respect of which the sum is applied, or
(b)
under section 633 of ITTOIA 2005 (capital sums paid to settlor by
trustees of settlement),
10

is not to be so treated.
(5)
An election under subsection (1) must be made on or before the first
anniversary of the normal self-assessment filing date for the tax year to which
it relates.
509
Change of circumstances during a tax year
15
(1)
If a change of circumstances arises during a tax year—
(a)
the part of the year before the change and the part of the year after the
change are to be treated as separate tax years for the purposes of section
508, this section and section 510, and
(b)
separate elections under section 508(1) may be made for each part.
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(2)
A change of circumstances arises if conditions A and B are met.
(3)
Condition A is that for any part of the tax year—
(a)
a heritage direction has effect, and
(b)
income arising from the heritage maintenance property comprised in
the settlement is treated as income of the settlor under Chapter 5 of Part
25
5 of ITTOIA 2005.
(4)
Condition B is that for the remaining part of the year one or both of the
following paragraphs applies—
(a)
no heritage direction has effect, and
(b)
no income arising from property comprised in the settlement is treated
30
as income of the settlor under Chapter 5 of Part 5 of ITTOIA 2005.
Absence of election and income treated as income of settlor: special rules
510
Sums applied for property maintenance purposes
(1)
This section applies if—
(a)
income arises from the heritage maintenance property comprised in a
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heritage maintenance settlement in a tax year in respect of which no
election is made under section 508,
(b)
the income is treated under Chapter 5 of Part 5 of ITTOIA 2005 as
income of the settlor, and
(c)
a sum in excess of the income is applied for a property maintenance
40
purpose in the year.
(2)
Any such sum which is so applied in that year, which would otherwise be
treated for income tax purposes as the income of a person—

Income Tax Bill
Part 9 — Special rules about settlements and trustees
Chapter 10 — Heritage maintenance settlements
270

(a)
because of the person’s interest in (or occupation of) the property in
respect of which the sum is applied, or
(b)
under section 633 of ITTOIA 2005 (capital sums paid to settlor by
trustees of settlement),

is not to be so treated.
5
511
Prevention of double taxation: reimbursement of settlor
(1)
This section applies to income arising from heritage maintenance property if—
(a)
the income is treated under Chapter 5 of Part 5 of ITTOIA 2005 as
income of the settlor,
(b)
the income is applied in reimbursing the settlor for expenditure
10
incurred by the settlor for a property maintenance purpose, and
(c)
the expenditure is deductible in calculating the profits of—
(i)
a trade, or
(ii)
a UK property business,

carried on by the settlor.
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(2)
Any such income—
(a)
is not to be brought into account as a receipt in calculating the profits of
that trade or business, and
(b)
is not to be treated as income of the settlor otherwise than under
Chapter 5 of Part 5 of ITTOIA 2005.
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Application of property for non-heritage purposes: charge to tax
512
Charge to tax on some settlements
(1)
Income tax is charged in respect of a heritage maintenance settlement on any
of the occasions described in cases A to D, subject to sections 516 and 517.
(2)
Case A is where any of the property comprised in the settlement (whether
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capital or income) is applied otherwise than—
(a)
for a property maintenance purpose, or
(b)
as respects income not so applied and not accumulated, for the benefit
of a heritage body.
(3)
Case B is where any of that property, on ceasing to be comprised in the
30
settlement, devolves otherwise than on a heritage body.
(4)
Case C is where the heritage direction ceases to have effect in respect of the
settlement.
(5)
Case D is where any of the property comprised in the settlement, on ceasing at
any time to be comprised in the settlement—
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(a)
devolves on a heritage body, and
(b)
at or before that time an interest under the settlement is or has been
acquired for a consideration in money or money’s worth by that or
another such body.
(6)
For the purposes of subsection (5)(b) any acquisition from another such body
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is to be ignored.