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Income Tax Act 2007 (c. 3)

(The document as of February, 2008)

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Chapter 8 Trustees' expenses and beneficiary's income

499 Application of Chapter

(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.

500 Restrictions on use of trustees' expenses to reduce the beneficiary's income

(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.

501 Non-UK resident beneficiaries

(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.

502 Meaning of "untaxed income" in section 501

(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.

503 How beneficiary's income is reduced

(1) This section applies if the beneficiary's income is to be reduced for income tax purposes by expenses of the trustees.

(2) The beneficiary's income is to be reduced in the following order--

  • first, reduce dividend income within subsection (3) (if any),

  • second, reduce dividend income not within that subsection (if any),

  • third, reduce savings income (if any), and

  • fourth, reduce other income (if any).

(3) 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).

(4) If the trustees are liable for income tax charged on a component of the beneficiary's income at a particular rate, then any reduction of that component is to be made in accordance with the steps set out in subsection (5).

(5) Here are the steps.

Step 1

Deduct from the component the amount of income tax charged on it at the particular rate for which the trustees are liable.

Step 2

Take the result from Step 1 and reduce it (but not below nil) by the amount of the trustees' expenses so far as they have not already been used to reduce other components of the beneficiary's income.

Step 3

Take the result from Step 2 and gross it up by reference to the particular rate.

The result is the reduced amount of the component of the beneficiary's income.



Chapter 9 Unauthorised unit trusts

504 Treatment of income of unauthorised unit trust

(1) This section applies for income tax purposes in relation to an unauthorised unit trust if the trustees are UK resident.

(2) If income arises to the trustees, the income is treated as the income of the trustees and not of the unit holders.

(3) If income tax on any part of the income would apart from this subsection be charged at the dividend ordinary rate or at the savings rate, income tax on that part of the income is charged at the basic rate instead.

(4) None of the following applies in relation to the income--

(a) section 479,

(b) section 397(1) of ITTOIA 2005 (tax credits for qualifying distributions),

(c) section 399(2) and (6) of ITTOIA 2005 (person not entitled to tax credit treated as having paid income tax), and

(d) section 400(2) and (3) of ITTOIA 2005 (person whose income includes non-qualifying distribution treated as having paid income tax).

(5) Sections 494 and 495 do not apply in relation to payments made by the trustees.

505 Relief for trustees of unauthorised unit trust

(1) This section applies if in a tax year the trustees of an unauthorised unit trust are treated as making a deemed payment.

(2) The trustees are entitled to a relief for the tax year equal to the gross amount of the payment.

(3) The relief is given by deducting that gross amount in calculating the trustees' net income for the tax year (see Step 2 of the calculation in section 23).

(4) But this is subject to subsections (5) to (7) and section 506.

(5) Relief is not to be given for the payment so far as it is ineligible for relief.

(6) For the purpose of determining the extent to which the payment is ineligible for relief (if at all) section 450 applies in relation to the payment as that section applies in relation to a payment to which section 449 applies.

(7) The total amount of the reliefs given under this section to the trustees for the tax year cannot be greater than the amount of the trustees' modified net income for the tax year (see section 1025).

(8) In this section and in section 506 "deemed payment" and "the gross amount" have the meanings given by section 941(6).

506 Special rules for trustees affected by section 733 of ICTA

(1) This section applies if--

(a) interest payable to the trustees of an unauthorised unit trust in respect of securities ("the affected income") is attributable to a tax year,

(b) because of section 733(1) of ICTA (dividend buying etc: persons entitled to exemptions), some part of the affected income is not exempt from income tax, and

(c) the trustees are treated as making deemed payments in the tax year.

(2) For the purposes of section 505(7) the trustees' modified net income for the tax year is reduced by the amount of the affected income.

(3) In this section "interest" and "securities" are to be read in accordance with section 731(9) of ICTA.



Chapter 10 Heritage maintenance settlements

Introduction

507 Overview of Chapter

(1) This Chapter makes provision about income arising from heritage maintenance property comprised in a heritage maintenance settlement.

(2) In this Chapter--

  • "heritage body" means a body or charity of a kind mentioned in paragraph 3(1)(a)(ii) of Schedule 4 to IHTA 1984 (maintenance funds for historic buildings etc),

  • "heritage direction" means a direction under paragraph 1 of that Schedule,

  • "heritage maintenance property" means any property in respect of which a heritage direction has effect,

  • "heritage maintenance settlement" means a settlement which comprises heritage maintenance property, and

  • "property maintenance purpose" means any of the purposes mentioned in paragraph 3(1)(a)(i) of that Schedule.

(3) If a settlement comprises both heritage maintenance property and other property, the heritage maintenance property and the other property are treated as comprised in separate settlements for the purposes of Chapters 2 to 8 of this Part and the following provisions--

(a) sections 64 to 66 and sections 75 to 79 (trade loss relief against general income),

(b) sections 83 to 88 (carry-forward trade loss relief), and

(c) Chapter 5 of Part 5 of ITTOIA 2005.



Trustees' election in respect of income etc

508 Election by trustees

(1) The trustees of a heritage maintenance settlement may elect for this section to have effect for a tax year.

(2) If an election under subsection (1) has effect for a tax year, the rules in subsections (3) and (4) apply.

(3) Income arising in the year from the heritage maintenance property comprised in the settlement, which would otherwise be treated as income of the settlor under Chapter 5 of Part 5 of ITTOIA 2005, is not to be so treated.

(4) Any sum applied out of the heritage maintenance property in the year for a property maintenance purpose, which would otherwise be treated for income tax purposes as the income of a person--

(a) because of the person's interest in (or occupation of) the property in respect of which the sum is applied, or

(b) under section 633 of ITTOIA 2005 (capital sums paid to settlor by trustees of settlement),

is not to be so treated.

(5) An election under subsection (1) must be made on or before the first anniversary of the normal self-assessment filing date for the tax year to which it relates.

509 Change of circumstances during a tax year

(1) If a change of circumstances arises during a tax year--

(a) the part of the year before the change and the part of the year after the change are to be treated as separate tax years for the purposes of section 508, this section and section 510, and

(b) separate elections under section 508(1) may be made for each part.

(2) A change of circumstances arises if conditions A and B are met.

(3) Condition A is that for any part of the tax year--

(a) a heritage direction has effect, and

(b) income arising from the heritage maintenance property comprised in the settlement is treated as income of the settlor under Chapter 5 of Part 5 of ITTOIA 2005.

(4) Condition B is that for the remaining part of the year one or both of the following paragraphs applies--

(a) no heritage direction has effect, and

(b) no income arising from property comprised in the settlement is treated as income of the settlor under Chapter 5 of Part 5 of ITTOIA 2005.



Absence of election and income treated as income of settlor: special rules

510 Sums applied for property maintenance purposes

(1) This section applies if--

(a) income arises from the heritage maintenance property comprised in a heritage maintenance settlement in a tax year in respect of which no election is made under section 508,

(b) the income is treated under Chapter 5 of Part 5 of ITTOIA 2005 as income of the settlor, and

(c) a sum in excess of the income is applied for a property maintenance purpose in the year.

(2) Any such sum which is so applied in that year, which would otherwise be treated for income tax purposes as the income of a person--

(a) because of the person's interest in (or occupation of) the property in respect of which the sum is applied, or

(b) under section 633 of ITTOIA 2005 (capital sums paid to settlor by trustees of settlement),

is not to be so treated.

511 Prevention of double taxation: reimbursement of settlor

(1) This section applies to income arising from heritage maintenance property if--

(a) the income is treated under Chapter 5 of Part 5 of ITTOIA 2005 as income of the settlor,

(b) the income is applied in reimbursing the settlor for expenditure incurred by the settlor for a property maintenance purpose, and

(c) the expenditure is deductible in calculating the profits of--

(i) a trade, or

(ii) a UK property business,

carried on by the settlor.

(2) Any such income--

(a) is not to be brought into account as a receipt in calculating the profits of that trade or business, and

(b) is not to be treated as income of the settlor otherwise than under Chapter 5 of Part 5 of ITTOIA 2005.



Application of property for non-heritage purposes: charge to tax

512 Charge to tax on some settlements

(1) Income tax is charged in respect of a heritage maintenance settlement on any of the occasions described in cases A to D, subject to sections 516 and 517.

(2) Case A is where any of the property comprised in the settlement (whether capital or income) is applied otherwise than--

(a) for a property maintenance purpose, or

(b) as respects income not so applied and not accumulated, for the benefit of a heritage body.

(3) Case B is where any of that property, on ceasing to be comprised in the settlement, devolves otherwise than on a heritage body.

(4) Case C is where the heritage direction ceases to have effect in respect of the settlement.

(5) Case D is where any of the property comprised in the settlement, on ceasing at any time to be comprised in the settlement--

(a) devolves on a heritage body, and

(b) at or before that time an interest under the settlement is or has been acquired for a consideration in money or money's worth by that or another such body.

(6) For the purposes of subsection (5)(b) any acquisition from another such body is to be ignored.

513 Income charged

(1) Tax is charged under section 512 on the whole of the income--

(a) which has arisen in the relevant period from the property comprised in the settlement, and

(b) which has not been applied (whether or not it has been first accumulated) for a property maintenance purpose or for the benefit of a heritage body.

(2) In this section "relevant period" means--

(a) if tax has become chargeable under section 512 in respect of the settlement on a previous occasion, the period since the last occasion, and

(b) in any other case, the period since the settlement took effect.

(3) Tax charged under section 512 is in addition to any tax otherwise chargeable.

(4) All the provisions of the Income Tax Acts relating to assessments and to the collection and recovery of income tax (so far as applicable) are to apply to that charge.

514 Persons liable

The persons liable for any tax charged under section 512 are the trustees of the settlement.

515 Rate of tax

Tax is charged under section 512 at the rate found by--

(a) taking the higher rate for the tax year during which the charge arises, and

(b) reducing it by the trust rate for that year.

516 Transfer of property between settlements

(1) This section applies if the whole of the property comprised in a settlement becomes comprised in another settlement because of a tax-free transfer.

(2) The occasion of charge under section 512, which would otherwise occur at the time of transfer, occurs when tax first becomes chargeable under that section in respect of any settlement comprising the transferred property ("the chargeable settlement").

(3) For the purposes of section 513(1) as it applies to the chargeable settlement, the relevant period is adjusted so that it begins--

(a) on the occasion when tax last became chargeable under section 512 in respect of any previous settlement from which the property was transferred, or

(b) if there has been no such occasion, when such previous settlement (or the first of them) took effect.

(4) In this section "tax-free transfer" means a transfer of property from one settlement into another in either of the following cases--

(a) where paragraph 9(1) of Schedule 4 to IHTA 1984 provides (or, but for paragraph 9(4) of that Schedule, would provide) an exception from charge in respect of the property, or

(b) where, both immediately before and immediately after the transfer, the property is heritage maintenance property.

517 Exemption for income treated as income of settlor

(1) Tax is not chargeable under section 512 in respect of income which is treated under section 624 or 629 of ITTOIA 2005 as income of the settlor.

(2) If such income arises in a tax year, any sums applied in the year--

(a) for a property maintenance purpose, or

(b) for the benefit of a heritage body,

are to be treated as paid first out of that income and, so far as there is any excess, out of income that does not fall within subsection (1).



Part 10 Special rules about charitable trusts etc

Introduction

518 Overview of Part

(1) This Part makes provision about some gifts and payments made to charitable trusts, including provision imposing charges to income tax and conferring exemptions from those charges (see sections 520 to 523).

(2) This Part also provides for some of the income of charitable trusts and others to be exempt from charges to income tax (see sections 524 to 537).

(3) In the provisions of this Part containing exemptions, references to total income of a charitable trust are to the total income of the trustees of the charitable trust concerned.

(4) See section 538 for provision about making claims for the exemptions under this Part.

(5) In the case of a charitable trust which has a non-exempt amount for a tax year (see section 540), the exemptions under this Part are subject to restrictions (see section 539).

(6) The non-exempt amount for a tax year depends on the charitable trust's attributable income and gains for the tax year and its non-charitable expenditure for the tax year (see sections 540 and 543 to 564).

519 Meaning of "charitable trust"

In this Part "charitable trust" means a trust established for charitable purposes only.



Gifts and other payments

520 Gifts entitling donor to gift aid relief: income tax treated as paid

(1) This section applies if a gift is made to a charitable trust by an individual and the gift is a qualifying donation for the purposes of Chapter 2 of Part 8 (gift aid).

(2) The charitable trust is treated as receiving, under deduction of income tax at the basic rate for the tax year in which the gift is made, a gift of an amount equal to the grossed up amount of the gift.

(3) The grossed up amount of the gift is the amount of the gift grossed up by reference to the basic rate for the tax year in which the gift is made.

(4) The income tax treated as deducted is treated as income tax paid by the trustees of the charitable trust.

521 Gifts entitling donor to gift aid relief: income tax liability and exemption

(1) This section applies if gifts are made to charitable trusts by individuals and the gifts are qualifying donations for the purposes of Chapter 2 of Part 8 (gift aid).

(2) Income tax is charged on the gifts under this section.

(3) It is charged on the grossed up amount of the gifts arising in the tax year.

(4) But a gift is not taken into account in calculating total income so far as it is applied to charitable purposes only.

(5) The grossed up amount of a gift is the amount of the gift grossed up by reference to the basic rate for the tax year in which the gift is made.

(6) The trustees of the charitable trust are liable for any tax charged under this section.

522 Gifts of money from companies: income tax liability and exemption

(1) This section applies if gifts of sums of money are made to charitable trusts by companies.

(2) But this section does not apply to a gift of a sum of money made by a company that is itself a charity (see section 523).

(3) Income tax is charged on the gifts under this section.

(4) It is charged on the full amount of the gifts arising in the tax year.

(5) But a gift is not taken into account in calculating total income so far as it is applied to charitable purposes only.

(6) The trustees of the charitable trust are liable for any tax charged under this section.

523 Payments from other charities: income tax liability and exemption

(1) This section applies to payments which--

(a) are received by charitable trusts from other charities,

(b) are not made for full consideration in money or money's worth,

(c) are not charged to income tax, apart from this section, and

(d) are not of a description which (on a claim) would be exempt from income tax under any of the exemptions conferred by this Part.

(2) This section does not apply to a payment which arises from a source outside the United Kingdom.

(3) Income tax is charged under this section on the payments.

(4) It is charged on the full amount of the payments arising in the tax year.

(5) But a payment is not taken into account in calculating total income so far as it is applied to charitable purposes only.

(6) The amount charged under this section in the case of certain payments made by the trustees of a charitable trust in the exercise of a discretion is subject to section 494 (grossing up of discretionary payments from trusts).

(7) The trustees of the charitable trust are liable for any tax charged under this section.



Other exemptions

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524 Exemption for profits etc of charitable trades

(1) The income mentioned in subsection (2) is not taken into account in calculating total income if conditions A and B are met.

(2) The income referred to in subsection (1) is--

(a) the profits of a trade carried on by a charitable trust,

(b) amounts treated as adjustment income of a charitable trust under section 228 of ITTOIA 2005 in respect of a trade carried on by the trust, and

(c) post-cessation receipts arising from a trade carried on by a charitable trust which are received by the trustees of the trust or to which they are entitled.

(3) Condition A is--

(a) in the case of the profits of a trade, that the profits are profits of a tax year in relation to which the trade is a charitable trade,

(b) in the case of an amount treated as adjustment income, that the amount arises in a tax year in relation to which the trade is a charitable trade, and

(c) in the case of a post-cessation receipt, that the trade was a charitable trade in relation to the tax year in which the cessation occurred.

See section 525 as to when a trade is a charitable trade in relation to a tax year.

(4) Condition B is that the profits are, or the amount or post-cessation receipt is, (as the case may be) applied to the purposes of the charitable trust only.

(5) Sections 232(1) and (2), 235 and 236 of ITTOIA 2005 (when adjustment income is treated as arising) apply for the purposes of subsection (3) as they apply for the purposes of Chapter 17 of Part 2 of that Act.

(6) In this section "post-cessation receipt" means an amount that is a post-cessation receipt for the purposes of Chapter 18 of Part 2 of ITTOIA 2005 (post-cessation receipts) (see sections 246 to 253 of that Act).

525 Meaning of "charitable trade"

(1) For the purposes of this Part a trade carried on by a charitable trust is a charitable trade in relation to a tax year if throughout the basis period for the tax year--

(a) the trade is exercised in the course of carrying out a primary purpose of the charitable trust, or

(b) the work in connection with the trade is mainly carried out by beneficiaries of the charitable trust.

(2) For the purposes of subsection (1)(a), if a trade is exercised partly in the course of carrying out a primary purpose of the charitable trust and partly otherwise, each part is to be treated as a separate trade.

(3) For the purposes of subsection (1)(b), if work in connection with a trade is carried out partly but not mainly by beneficiaries, the part in connection with which work is carried out by beneficiaries and the other part are to be treated as separate trades.

(4) If different parts of a trade are treated as separate trades under subsection (2) or (3), a just and reasonable apportionment is to be made for that purpose of--

(a) expenses and receipts of the trade, and

(b) any amounts which are treated as adjustment income under section 228 of ITTOIA 2005 in respect of the trade, or which are post-cessation receipts arising from the trade for the purposes of Chapter 18 of Part 2 of that Act.

(5) For the rules about basis periods, see Chapter 15 of Part 2 of ITTOIA 2005.

526 Exemption for profits etc of small-scale trades

(1) The income mentioned in subsection (2) is not taken into account in calculating total income if conditions A and B are met.

(2) The income referred to in subsection (1) is--

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