Income and Corporation Taxes Act 1988 (c. 1)

PART XV U.K. SETTLEMENTS

Modifications etc. (not altering text)

C1 Pt. 15 modified (with effect in accordance with s. 105(1) of the modifying Act) by Finance Act 1996 (c. 8), Sch. 13 para. 6(1) (with Sch. 13 para. 16, Sch. 15)

[F1 CHAPTER 1C U.K. LIABILITY OF TRUSTEES]

Textual Amendments

F1 Pt. 15 Ch. 1C heading substituted for heading before s. 686 (with effect in accordance with s. 74(2) of the amending Act) by Finance Act 1995 (c. 4), Sch. 17 para. 12

Modifications etc. (not altering text)

C2 Pt. 15 Ch. 1C modified (6.4.2005 with effect in accordance with s. 883(1) of the modifying Act) by Income Tax (Trading and Other Income) Act 2005 (c. 5), s. 457(1)(3) (with Sch. 2)

F2 . . . U.K.

Textual Amendments

F2 Cross-heading before s. 686 replaced by Pt. 15 Ch. 1C heading (with effect in accordance with s. 74(2) of the amending Act) by Finance Act 1995 (c. 4), Sch. 17 para. 12

686 [F3 Accumulation and discretionary trusts: special rates of tax.] U.K.

(1) M1 So far as income arising to [F4 the trustees of a settlement] is income to which this section applies it shall [F5 (subject to section 686D) ][F6 be chargeable to income tax [F7 at the rate applicable in accordance with subsection (1AA) below], instead of at the basic rate or, in accordance with [F8 section 1A], at the lower rate [F9 or the [F10 dividend] ordinary rate].]

[F11 (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 [F12 distribution] type income, the [F13 dividend] trust rate; and

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

[F14 (1A) [F15 In relation to any year of assessment for which income tax is charged—

(a) the [F16 dividend] trust rate shall be [F17 32.5 per cent]., and

(b) the rate applicable to trusts shall be [F18 40 per cent].,

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

[F19 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 [F20 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

[F21 (b) is not, before being distributed, F22 . . . [F23 the income of a person other than the trustees]; and]

[F24 (c) is not income arising under a trust established for charitable purposes only or [F25 , subject to section (6A) below,] income from investments, deposits or other property held [F26 for the purposes of a superannuation fund to which section 615(3) applies]; F27 . . . ]

(d) F27 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

[F28 (2AA) The rate at which income tax is chargeable on so much of any income [F29 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 [F30 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 [F31 or the [F32 dividend] trust rate (as the case may be)].]

[F33 (2A) For the purposes of this section where—

(a) [F34 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 [F35 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 [F36 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.]

[F37 (2B) For the purposes of subsection (2A) above where the income tax borne by any income [F38 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 trusteesF39 .

(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 accordinglyF40 .

(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.

[F41 (5A) In this section [F42 “distribution type] income”, [F43 in relation to the trustees of a settlement], means—

[F44 (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 [F45 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.]]

[F46 (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 “ [F47 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 [F47 the trustees of a settlement] any sum representing income which, if personal representatives were [F47 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 [F48 applicable rate].

This subsection shall be construed as if it were contained in [F49 Chapter 6 of Part 5 of ITTOIA 2005].

[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

F3 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)

F4 Words in s. 686(1) substituted (6.4.2006) by Finance Act 2006 (c. 25), Sch. 13 paras. 15(2), 27(1)

F5 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)

F6 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)

F7 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)

F8 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

F9 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)

F10 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)

F11 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)

F12 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)

F13 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)

F14 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)

F15 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)

F16 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)

F17 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)

F18 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)

F19 Words in s. 686(1A) substituted (6.4.1999) by Finance (No. 2) Act 1997 (c. 58), s. 32(5)(10)

F20 Words in s. 686(2) substituted (6.4.2006) by Finance Act 2006 (c. 25), Sch. 13 paras. 15(3), 27(1)

F21 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

F22 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

F23 Words in s. 686(2)(b) substituted (6.4.2006) by Finance Act 2006 (c. 25), Sch. 13 para. 2(1)(b)(2)

F24 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”.

F25 Words in s. 686(2)(c) inserted (6.4.2001) by Finance Act 2001 (c. 9), s. 76, Sch. 25 para. 3(2)

F26 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)

F27 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

F28 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)

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

F30 Words in s. 686(2AA)(b) substituted (6.4.2006) by Finance Act 2006 (c. 25), Sch. 13 paras. 15(4)(b), 27(1)

F31 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)

F32 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)

F33 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)

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

F35 Words in s. 686(2A)(a) substituted (6.4.2006) by Finance Act 2006 (c. 25), Sch. 13 paras. 15(5)(b), 27(1)

F36 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)

F37 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

F38 Words in s. 686(2B) substituted (6.4.2006) by Finance Act 2006 (c. 25), Sch. 13 paras. 15(6), 27(1)

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

F40 Repealed by 1989 s.187and Sch.17 Part Vin relation to accounting periods beginning after 31March 1989.

F41 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)

F42 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)

F43 Words in s. 686(5A) substituted (6.4.2006) by Finance Act 2006 (c. 25), Sch. 13 paras. 15(7)(a), 27(1)

F44 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)

F45 Words in s. 686(5A)(f) substituted (6.4.2006) by Finance Act 2006 (c. 25), Sch. 13 paras. 15(7)(b), 27(1)

F46 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)

F47 Words in s. 686(6) substituted (6.4.2006) by Finance Act 2006 (c. 25), Sch. 13 paras. 15(8), 27(1)

F48 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)

F49 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)

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)

C3 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)

C4 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).

C5 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.

C6 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.