Finance (No. 2) Act 1997

32 Trusts. U.K.

(1) Section 686 of the Taxes Act 1988 (income arising to trustees which is to be chargeable at the rate applicable to trusts) shall be amended as follows.

(2) In subsection (1) (income to which the section applies to be chargeable at the rate applicable to trusts instead of at the basic rate or, in accordance with section 1A, the lower rate)—

(a) for “at the rate applicable to trusts” there shall be substituted “ at the rate applicable in accordance with subsection (1AA) below ”; and

(b) after “at the lower rate” there shall be inserted “ or the Schedule F ordinary rate ”.

(3) After subsection (1) there shall be inserted—

“(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 Schedule F type income, the Schedule F trust rate; and

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

(4) In subsection (1A) (the rate applicable to trusts etc) for the words from the beginning to “Parliament may determine” there shall be substituted—

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

(a) the Schedule F trust rate shall be 25 per cent., and

(b) the rate applicable to trusts shall be 34 per cent.,

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

(5) In subsection (1A), so as to make the words following “as Parliament may determine” into a separate paragraph, for the words “and, for the purposes of assessments” there shall be substituted—

“For the purposes of assessments

. ”

(6) In subsection (2AA) (income treated by s.689B as applied in defraying trustees’ expenses to be taxed at the rate that would apply apart from s.686, instead of the rate applicable to trusts) after “instead of the rate applicable to trusts” there shall be inserted “ or the Schedule F trust rate (as the case may be) ”.

(7) Before subsection (6) there shall be inserted—

“(5A) In this section “Schedule F type income”, in relation to trustees, means—

(a) income chargeable under Schedule F;

(b) income to which section 1A applies by virtue of its being equivalent foreign income falling within subsection (3)(b) of that section and chargeable under Case V of Schedule D;

(c) a qualifying distribution whose amount or value is determined in accordance with section 233(1A);

(d) a non-qualifying distribution, within the meaning of section 233(1B);

(e) income treated as arising to the trustees by virtue of section 249(6)(b);

(f) income treated as received by the trustees by virtue of section 421(1)(a);

(g) any amount which, by virtue of section 686A, is treated for the purposes of the Tax Acts as if it were income to which this section applies.”

(8) For the sidenote there shall be substituted “ Accumulation and discretionary trusts: special rates of tax. ”

(9) After section 686 of the Taxes Act 1988 there shall be inserted—

“686A Certain distributions to be treated as income to which section 686 applies.

(1) This section applies where—

(a) a qualifying distribution is made to trustees;

(b) the trustees are not the trustees of a unit trust scheme; and

(c) the qualifying distribution falls within subsection (2) below.

(2) A qualifying distribution falls within this subsection if it is a payment made by a company—

(a) on the redemption, repayment or purchase of its own shares; or

(b) on the purchase of rights to acquire its own shares.

(3) The relevant part of the distribution shall be treated for the purposes of the Tax Acts as if it were income to which section 686 applies.

(4) In subsection (3) above the reference to the relevant part of the distribution is a reference to so much (if any) of the distribution as—

(a) is not income falling within paragraph (a) of section 686(2);

(b) does not fall to be treated for the purposes of the Income Tax Acts as income of a settlor;

(c) is not income arising under a trust established for charitable purposes; and

(d) is not income from investments, deposits or other property held for any such purposes as are mentioned in sub-paragraph (i) or (ii) of section 686(2)(c).

(5) Subsection (6) of section 686 shall apply for the purposes of this section as it applies for the purposes of that section.”

(10) The amendment made by subsection (5) above has effect on and after 6th April 1999.

(11) The other amendments made by this section have effect in relation to distributions made on or after 6th April 1999.