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PART 9 continued CHAPTER 3 continued
(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
(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)).
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 amount—
(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 superannuation fund to which section 615(3) of ICTA (superannuation funds relating to undertakings outside the UK) applies.
The types of amount referred to in section 481 are as follows.
Type 1
A payment—
which is made to the trustees or to which the trustees are entitled, and
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.
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 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
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).
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
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—
in relation to which the trustees are liable for income tax under section 557 of ITTOIA 2005 (disposals of futures and options), and
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).
Type 11
Income treated as arising to the trustees under Chapter 3 of Part 13 of this Act (tax avoidance: transactions in land).
(1) This section applies if, during or at the end of the administration period for an 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 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—
“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).
(1) This section applies if the trustees of a settlement incur allowable expenses in a tax year (“the current tax year”).
(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 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 the settlement.
(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.
(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.
(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 section.
(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
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
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)—
gross up by reference to the dividend ordinary rate so much of the allowable expenses as is necessary to give a result equal to the amount of that income, or
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 (2).
Step 4
If there are remaining expenses and there is dividend income not within subsection (2)—
gross up by reference to the dividend ordinary rate so much of the remaining expenses as is necessary to give a result equal to the amount of that income, or
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 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—
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 income, or
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 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—
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 income, or
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 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 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 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.
(1) This section applies if a proportion of the income arising to the trustees in the current tax year is untaxed income.
(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.
(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 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 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
(c) there are tax credits in respect of the income.
(1) This section applies if—
(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.
(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 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 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.
(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 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
(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).
(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—
“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 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
(b) exists solely for the purposes of that plan.
(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 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.
(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.
(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).
(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 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 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 at the trust rate as a result of Chapter 4 are excluded from the trustees' trust rate income for the purposes of this section.
(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 (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.
(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
(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.
(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),
(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.
(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 payment”.
(5) In this Chapter “payment” includes payment in money’s worth.
(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 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).
(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.
(1) If the person who is treated as having paid income tax requests it in writing, 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.
(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.
(1) Income tax is charged for a tax year if—
(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.
(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.
(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
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
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 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
(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.
(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 rate.
Type 2
The amount of tax at the nominal rate on any income which is—
chargeable under Chapter 3 of Part 4 of ITTOIA 2005 (dividends etc from UK resident companies),
chargeable under Chapter 5 of that Part (stock dividends from UK resident companies), or
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.
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 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 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.
(1) This Chapter applies if—
(a) in a tax year (“the current tax year”) income arises to the trustees of a settlement, and
(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.
(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
(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 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
(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 into account for the purpose of calculating the trustees' liability to income tax for any tax year.
(1) This section applies if—
(a) expenses of the trustees are to be used to reduce the beneficiary’s 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 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.
(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.
(1) For the purposes of section 501 the beneficiary’s income is untaxed income so 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
(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 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 paid in respect of the income, or
(c) there are tax credits in respect of the income.
Income Tax Act 2007