Income and Corporation Taxes Act 1988

686 [F1 Accumulation and discretionary trusts: special rates of tax.] U.K.

(1) M1 So far as income arising to [F2 the trustees of a settlement] is income to which this section applies it shall [F3 (subject to section 686D) ][F4 be chargeable to income tax [F5 at the rate applicable in accordance with subsection (1AA) below], instead of at the basic rate or, in accordance with [F6 section 1A], at the lower rate [F7 or the [F8 dividend] ordinary rate].]

[F9 (1AA) The rate applicable in accordance with this subsection is—

(a) in the case of so much of any income to which this section applies as is [F10 distribution] type income, the [F11 dividend] trust rate; and

(b) in the case of any other income to which this section applies, the rate applicable to trusts.]

[F12 (1A) [F13 In relation to any year of assessment for which income tax is charged—

(a) the [F14 dividend] trust rate shall be [F15 32.5 per cent]., and

(b) the rate applicable to trusts shall be [F16 40 per cent].,

or, in either case, such other rate as Parliament may determine.]

[F17 For the purposes of assessments] for the year 1993-94 and in relation to years of assessment for which tax at the basic rate and the additional rate was separately chargeable, references to the charging of income with tax at the rate applicable to trusts shall be taken to include references to the charging of income with tax both at the basic rate and at the additional rate.]

(2) This section applies to income [F18 arising to the trustees of a settlement] in any year of assessment so far as it—

(a) is income which is to be accumulated or which is payable at the discretion of the trustees or any other person (whether or not the trustees have power to accumulate it); and

[F19 (b) is not, before being distributed, F20 . . . [F21 the income of a person other than the trustees]; and]

[F22 (ba) is not income from service charges held on trust (or, in Scotland, held in trust) by a relevant housing body; and]

[F23 (c) is not income arising under a trust established for charitable purposes only or [F24 , subject to section (6A) below,] income from investments, deposits or other property held [F25 for the purposes of a superannuation fund to which section 615(3) applies]; F26 . . . ]

(d) F26 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

[F27 (2AA) The rate at which income tax is chargeable on so much of any income [F28 arising to the trustees of a settlement] in any year of assessment as—

(a) is income to which this section applies, and

(b) is treated in accordance with section 689B as applied in defraying the expenses of the trustees in that year which are properly chargeable to income (or would be so chargeable but for any express [F29 terms of the settlement]),

shall be the rate at which it would be chargeable on that income apart from this section, instead of the rate applicable to trusts [F30 or the [F31 dividend] trust rate (as the case may be)].]

[F32 (2A) For the purposes of this section where—

(a) [F33 the trustees of a settlement] have expenses in any year of assessment (“management expenses”) which are properly chargeable to income or would be so chargeable but for any express [F34 terms of the settlement], and

(b) there is income arising to them in that year (“the untaxed income”) which does not bear income tax for that year by reason wholly or partly of the trustees not having been resident in the United Kingdom or being deemed under any arrangements under section 788, or any arrangements having effect by virtue of that section, to have been resident in a territory outside the United Kingdom,

there shall be disregarded for the purposes of [F35 subsection (2AA)] above such part of the management expenses as bears the same proportion to all those expenses as the untaxed income bears to all the income arising to the trustees in that year.]

[F36 (2B) For the purposes of subsection (2A) above where the income tax borne by any income [F37 arising to the trustees of a settlement] is limited in accordance with section 128 of the M2 Finance Act 1995 (limit on income chargeable on non-residents), the income arising to the trustees which shall be taken not to bear tax by reason wholly or partly of their not having been resident in the United Kingdom shall include so much of any income arising to them as—

(a) is excluded income within the meaning of that section; and

(b) is not income which is treated for the purposes of subsection (1)(b) of that section as income the tax on which is deducted at source.]

(3) This section also applies to sums apportioned to the trustees under section 423and treated, under 426(2)as applied by subsection (4)below, as income received by the trusteesF38 .

(4) Sections 426(1)and (2), 427and 428shall, with the omission in section 426(2)(a)of the words following “the apportionment relates”, the substitution of “ income ” for “total income” and all other necessary modifications, apply to a sum apportioned to trustees as they apply to sums apportioned to an individual; and section 429shall apply accordinglyF39 .

(5) For the purposes of this section sums paid or credited to trustees in any year of assessment in respect of dividends or interest payable in respect of shares in or deposits with or loans to a building society being sums in respect of which the society is required to account for and pay an amount in accordance with regulations under section 476(1) shall be treated as income for that year received by the trustees after deduction of income tax from a corresponding gross amount.

In this subsection expressions used in section 476 have the same meanings as in that section.

[F40 (5A) In this section [F41 “distribution type] income”, [F42 in relation to the trustees of a settlement], means—

[F43 (a) income chargeable under Chapter 3 of Part 4 of ITTOIA 2005 (dividends etc. from UK resident companies etc.);

(b) income chargeable under Chapter 4 of that Part (dividends from non-UK resident companies);

(c) income treated as arising to the trustees under Chapter 5 of that Part (stock dividends from UK resident companies);

(d) income chargeable under Chapter 6 of that Part (release of loan to participator in close company);

(e) a relevant foreign distribution chargeable under Chapter 8 of Part 5 of that Act (income not otherwise charged); or

(f) any amount which, by virtue of section [F44 686A(2)(a)] of this Act, is treated for the purposes of the Tax Acts as if it were income to which this section applies.]]

[F45 (5B) In subsection (5A) “relevant foreign distribution” means any distribution of a company not resident in the United Kingdom which—

(a) is not chargeable under Chapter 4 of Part 4 of ITTOIA 2005, but

(b) would be chargeable under Chapter 3 of that Part if the company were resident in the United Kingdom.]

(6) In this section “ [F46 the trustees of a settlement]” does not include personal representatives; but where personal representatives, on or before the completion of the administration of the estate, pay to [F46 the trustees of a settlement] any sum representing income which, if personal representatives were [F46 the trustees of a settlement] within the meaning of this section, would be income to which this section applies, that sum shall be deemed to be paid to the trustees as income and to have borne income tax at the [F47 applicable rate].

This subsection shall be construed as if it were contained in [F48 Chapter 6 of Part 5 of ITTOIA 2005].

[F49 (6ZA) In this section—

• “relevant housing body” means—

  (a)

  a local authority,

  (b)

  a registered social landlord,

  (c)

  a Northern Ireland housing association,

  (d)

  a charitable housing association,

  (e)

  a charitable housing trust,

  (f)

  a housing action trust established under Part 3 of the Housing Act 1988,

  (g)

  the Housing Corporation, or

  (h)

  the Northern Ireland Housing Executive; and

• “service charge” has the meaning given by section 18(1) of the Landlord and Tenant Act 1985.

(6ZB) In subsection (6ZA)—

• “charitable housing association” means a society, body or company which—

  (a)

  satisfies the conditions in section 5(1)(a) and (b) of the Housing Act 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;

• “charitable housing trust” means a corporation or body which—

  (a)

  satisfies the condition in section 6(a) or (b) of the Housing Act 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;

• “Northern Ireland housing association” means a body which is registered in the register maintained under Article 14 of the Housing (Northern Ireland) Order 1992; and

• “registered social landlord” means a body which is registered in a register maintained under section 1 of the Housing Act 1996 or section 57 of the Housing (Scotland) Act 2001.]

[F50 (6A) The [F51 exemption] provided for by subsection (2)(c) above in relation to income from investments, deposits or other property held [F52 for the purposes of a superannuation fund to which section 615(3) applies does] not apply to income derived from investments, deposits or other property held as a member of a property investment LLP.]

Textual Amendments

F1 S. 686 sidenote substituted (with effect in accordance with s. 32(11) of the amending Act) by Finance (No. 2) Act 1997 (c. 58), s. 32(8)

F2 Words in s. 686(1) substituted (6.4.2006) by Finance Act 2006 (c. 25), Sch. 13 paras. 15(2), 27(1)

F3 Words in s. 686(1) inserted (with effect in accordance with s. 14(5) of the amending Act) by Finance Act 2005 (c. 7), s. 14(2)

F4 Words in s. 686(1) substituted (27.7.1993 with effect for the year 1993-1994 and subsequent years of assessment) by 1993 c. 34, s. 79, Sch. 6 paras. 8(1), 25(1)

F5 Words in s. 686(1) substituted (with effect in accordance with s. 32(11) of the amending Act) by Finance (No. 2) Act 1997 (c. 58), s. 32(2)(a)

F6 Words in s. 686(1) substituted (with effect in accordance with Sch. 6 para. 28 of the amending Act) by Finance Act 1996 (c. 8), Sch. 6 para. 13

F7 Words in s. 686(1) inserted (with effect in accordance with s. 32(11) of the amending Act) by Finance (No. 2) Act 1997 (c. 58), s. 32(2)(b)

F8 Word in s. 686(1) substituted (6.4.2005 with effect in accordance with s. 883(1) of the amending Act) by Income Tax (Trading and Other Income) Act 2005 (c. 5), Sch. 1 para. 277(2) (with Sch. 2)

F9 S. 686(1AA) inserted (with effect in accordance with s. 32(11) of the amending Act) by Finance (No. 2) Act 1997 (c. 58), s. 32(3)

F10 Word in s. 686(1AA)(a) substituted (6.4.2005 with effect in accordance with s. 883(1) of the amending Act) by Income Tax (Trading and Other Income) Act 2005 (c. 5), Sch. 1 para. 277(3)(a) (with Sch. 2)

F11 Word in s. 686(1AA)(a) substituted (6.4.2005 with effect in accordance with s. 883(1) of the amending Act) by Income Tax (Trading and Other Income) Act 2005 (c. 5), Sch. 1 para. 277(3)(b) (with Sch. 2)

F12 S. 686(1A) inserted (27.7.1993 with effect for the year 1993-1994 and subsequent years of assessment) by 1993 c. 34, s. 79, Sch. 6 paras. 8(2), 25(1)

F13 Words in s. 686(1A) substituted (with effect in accordance with s. 32(11) of the amending Act) by Finance (No. 2) Act 1997 (c. 58), s. 32(4)

F14 Word in s. 686(1A)(a) substituted (6.4.2005 with effect in accordance with s. 883(1) of the amending Act) by Income Tax (Trading and Other Income) Act 2005 (c. 5), Sch. 1 para. 277(4) (with Sch. 2)

F15 Words in s. 686(1A)(a) substituted (with effect in accordance with s. 29(3) of the amending Act) by Finance Act 2004 (c. 12), s. 29(2)(a)

F16 Words in s. 686(1A)(b) substituted (with effect in accordance with s. 29(3) of the amending Act) by Finance Act 2004 (c. 12), s. 29(2)(b)

F17 Words in s. 686(1A) substituted (6.4.1999) by Finance (No. 2) Act 1997 (c. 58), s. 32(5)(10)

F18 Words in s. 686(2) substituted (6.4.2006) by Finance Act 2006 (c. 25), Sch. 13 paras. 15(3), 27(1)

F19 S. 686(2)(b) substituted (with effect in accordance with s. 74(2) of the amending Act) by Finance Act 1995 (c. 4), Sch. 17 para. 13

F20 Word in s. 686(2)(b) repealed (6.4.2006) by Finance Act 2006 (c. 25), Sch. 13 para. 2(1)(a)(2), Sch. 26 Pt. 3(15), Note

F21 Words in s. 686(2)(b) substituted (6.4.2006) by Finance Act 2006 (c. 25), Sch. 13 para. 2(1)(b)(2)

F22 S. 686(2)(ba) inserted (with effect in accordance with s. 90(4) of the amending Act) by Finance Act 2006 (c. 25), s. 90(2)

F23 1988(F) s.55(3)—from 1July 1988.Previously

“(c) is not income arising under a trust established for charitable purposes only or income from investments, deposits or other property held for the purposes of a fund or scheme established for the sole purpose of providing relevant benefits within the meaning of section 612; and”.

F24 Words in s. 686(2)(c) inserted (6.4.2001) by Finance Act 2001 (c. 9), s. 76, Sch. 25 para. 3(2)

F25 Words in s. 686(2)(c) substituted (6.4.2006) by Finance Act 2004 (c. 12), s. 284(1), Sch. 35 para. 29(2) (with Sch. 36)

F26 S. 686(2)(d) and preceding word repealed (with effect in accordance with Sch. 7 para. 12(4) of the repealing Act) by Finance Act 1997 (c. 16), Sch. 7 paras. 1, 12(1), Sch. 18 Pt. 6(7), Note 1

F27 S. 686(2AA) inserted (with effect in accordance with Sch. 7 para. 12(4) of the amending Act) by Finance Act 1997 (c. 16), Sch. 7 paras. 1, 12(1)

F28 Words in s. 686(2AA) substituted (6.4.2006) by Finance Act 2006 (c. 25), Sch. 13 paras. 15(4)(a), 27(1)

F29 Words in s. 686(2AA)(b) substituted (6.4.2006) by Finance Act 2006 (c. 25), Sch. 13 paras. 15(4)(b), 27(1)

F30 Words in s. 686(2AA) inserted (with effect in accordance with s. 32(11) of the amending Act) by Finance (No. 2) Act 1997 (c. 58), s. 32(6)

F31 Word in s. 686(2AA) substituted (6.4.2005 with effect in accordance with s. 883(1) of the amending Act) by Income Tax (Trading and Other Income) Act 2005 (c. 5), Sch. 1 para. 277(5) (with Sch. 2)

F32 S. 686(2A) inserted (27.7.1993 with effect for the year 1993-1994 and subsequent years of assessment) by 1993 c. 34, s. 79, Sch. 6 paras. 8(3), 25(1)

F33 Words in s. 686(2A)(a) substituted (6.4.2006) by Finance Act 2006 (c. 25), Sch. 13 paras. 15(5)(a), 27(1)

F34 Words in s. 686(2A)(a) substituted (6.4.2006) by Finance Act 2006 (c. 25), Sch. 13 paras. 15(5)(b), 27(1)

F35 Words in s. 686(2A) substituted (with effect in accordance with Sch. 7 para. 12(4) of the amending Act) by Finance Act 1997 (c. 16), Sch. 7 paras. 1, 12(2)

F36 S. 686(2B) inserted (with effect in accordance with Sch. 6 para. 28 of the amending Act) by Finance Act 1996 (c. 8), Sch. 6 para. 15

F37 Words in s. 686(2B) substituted (6.4.2006) by Finance Act 2006 (c. 25), Sch. 13 paras. 15(6), 27(1)

F38 Repealed by 1989 s.187and Sch.17 Part Vin relation to accounting periods beginning after 31March 1989.

F39 Repealed by 1989 s.187and Sch.17 Part Vin relation to accounting periods beginning after 31March 1989.

F40 S. 686(5A) inserted (with effect in accordance with s. 32(11) of the amending Act) by Finance (No. 2) Act 1997 (c. 58), s. 32(7)

F41 Words in s. 686(5A) substituted (6.4.2005 with effect in accordance with s. 883(1) of the amending Act) by Income Tax (Trading and Other Income) Act 2005 (c. 5), Sch. 1 para. 277(6) (with Sch. 2)

F42 Words in s. 686(5A) substituted (6.4.2006) by Finance Act 2006 (c. 25), Sch. 13 paras. 15(7)(a), 27(1)

F43 S. 686(5A)(a)-(f) substituted for s. 686(5A)(a)-(g) (6.4.2005 with effect in accordance with s. 883(1) of the amending Act) by Income Tax (Trading and Other Income) Act 2005 (c. 5), Sch. 1 para. 277(6) (with Sch. 2)

F44 Words in s. 686(5A)(f) substituted (6.4.2006) by Finance Act 2006 (c. 25), Sch. 13 paras. 15(7)(b), 27(1)

F45 S. 686(5B) inserted (6.4.2005 with effect in accordance with s. 883(1) of the amending Act) by Income Tax (Trading and Other Income) Act 2005 (c. 5), Sch. 1 para. 277(7) (with Sch. 2)

F46 Words in s. 686(6) substituted (6.4.2006) by Finance Act 2006 (c. 25), Sch. 13 paras. 15(8), 27(1)

F47 Words in s. 686(6) substituted (27.7.1993 with effect for the year 1993-1994 and subsequent years of assessment) by 1993 c. 34, s. 79, Sch. 6 paras. 8(4), 25(1)

F48 Words in s. 686(6) substituted (6.4.2005 with effect in accordance with s. 883(1) of the amending Act) by Income Tax (Trading and Other Income) Act 2005 (c. 5), Sch. 1 para. 277(8) (with Sch. 2)

F49 S. 686(6ZA)(6ZB) inserted (with effect in accordance with s. 90(4) of the amending Act) by Finance Act 2006 (c. 25), s. 90(3)

F50 S. 686(6A) inserted (6.4.2001) by Finance Act 2001 (c. 9), s. 76, Sch. 25 para. 3(3)

F51 Word in s. 686(6A) substituted (6.4.2006) by Finance Act 2004 (c. 12), s. 284(1), Sch. 35 para. 29(3)(a) (with Sch. 36)

F52 Words in s. 686(6A) substituted (6.4.2006) by Finance Act 2004 (c. 12), s. 284(1), Sch. 35 para. 29(3)(b) (with Sch. 36)

Modifications etc. (not altering text)

C1 S. 686 extended (with effect in accordance with Sch. 7 para. 3(5) of the extending Act) by Finance Act 1997 (c. 16), Sch. 7 paras. 1, 3(2)

C2 See—s.186(11)—approved profit sharing schemes.s.454—underwriter's special reserve fund not to be treated as settlement.s.469(1)—unit trusts.s.832— “additional rate”

defined.1990 s.56and Sch.10 para.19—convertible securities.Vol.1. Table D(2).

C3 See 1990 s.30and Sch.5 para.13and s.132and Sch.19 Part IV—subs.(5)repealed as regards a sum paid or credited on or after 6April 1991.

C4 S. 686(6) applied (with effect in accordance with Sch. 7 para. 3(5) of the affecting Act) by Finance Act 1997 (c. 16), Sch. 7 paras. 1, 3(4)

Marginal Citations

M1 Source-1973 s.16(1)-(6); 1986 s.47(4)(a)

M2 1995 c. 4.