PART XV SETTLEMENTS

CHAPTER 1C LIABILITY OF TRUSTEES

. . .

686F1Accumulation and discretionary trusts: special rates of tax.

(1)

M1 So far as income arising to F2the trustees of a settlement is income to which this section applies it shall F3(subject to section 686D) F4be chargeable to income tax F5at the rate applicable in accordance with subsection (1AA) below, instead of at the basic rate or, in accordance with F6section 1A, at the lower rate F7or the F8dividend 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 F10distribution type income, the F11dividend trust rate; and

(b)

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

F12(1A)

F13In relation to any year of assessment for which income tax is charged—

(a)

the F14dividend trust rate shall be F1532.5 per cent., and

(b)

the rate applicable to trusts shall be F1640 per cent.,

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

F17For 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 F18arising 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. . . F21the 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 F25for 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 F28arising 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 F29terms 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 F30or the F31dividend trust rate (as the case may be).

F32(2A)

For the purposes of this section where—

(a)

F33the 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 F34terms 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 F35subsection (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 F37arising to the trustees of a settlement is limited in accordance with section 128 of the M2Finance 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”, F42in 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 F44686A(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 “ F46the 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 F46the trustees of a settlement any sum representing income which, if personal representatives were F46the 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 F47applicable rate.

This subsection shall be construed as if it were contained in F48Chapter 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 F51exemption provided for by subsection (2)(c) above in relation to income from investments, deposits or other property held F52for 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.