Finance Bill Tracking Service 2007 | Budget 2007 | Budget Notes

BN42 Amending legislation for trust modernisation

Who is likely to be affected?

1   Trustees receiving certain types of capital receipts which, for tax purposes, are treated in their hands as income.

General description of the measure

2   Legislation forming part of the Trust Modernisation programme was included in Finance Act 2006. Two minor omissions in this legislation have since come to light and therefore rectifying legislation will be included in Finance Bill 2007.

3   The first omission relates to payments received by trustees, following the purchase by a company of its own shares.

4   The second omission concerns the interaction of trustees' tax pools with payments received by trustees which are chargeable event gains on certain life assurance policies. Both types of payment are treated as income in the hands of the trustees.

Operative date

5   The first omission will be rectified with effect on or after 6 April 2006. Rectification of the second omission will take effect on or after 6 April 2007.

Current law and proposed revisions

6   Paragraph 3 of Schedule 13 to Finance Act 2006 extended section 686A Income and Corporation Taxes Act 1988 (ICTA - this has now been replaced by section 481 and 482 of the Income Tax Act 2007 (ITA)). It provided a common mechanism to charge income tax at the special trust rates on the various types of capital receipt which are assessable to income tax in the hands of the trustees receiving them. Income tax is payable by trustees at the rate applicable to trusts (40%) or the dividend trust rate (32.5%).

7   There is however an omission in the wording of the revised section 686A. This means for a company buying back its own shares, that trustees who are shareholders would be charged tax on the entire payment received, rather than on the amount in excess of the original subscription price. Section 686A of ICTA will therefore be amended by Finance Bill 2007 to rectify this. The replacement legislation in ITA will also be amended by Finance Bill 2007.

8   The second omission also relates to payments within section 686A, as extended. These are payments received by trustees which are chargeable event gains on certain types of life insurance policy, capital redemption policy or life annuity contract. This omission concerns interacting legislation for trustees' tax pools. The tax pool is a statutory mechanism for ensuring that tax credits given to beneficiaries of a discretionary trust are covered by the tax paid by the trustees. There is a notional tax credit of 20% on chargeable event gains from some of these policies which should not enter the tax pool. However the legislation relating to the tax pool – section 687 ICTA - was not amended at the time of Finance Act 2006 to ensure that this notional tax credit did not do so.

9   Section 687 ICTA has been replaced by section 498 of ITA and therefore this replacement legislation is being amended to correct the omission. There will be no need to amend section 687 itself because the rectifying legislation will take effect on or after 6 April 2007, when section 687 will no longer have effect.

Further advice

10 The intention to legislate to rectify the first omission was announced in a Ministerial Written Statement by the Paymaster General on 9 October 2006. Draft legislation for both this omission and the second omission was issued for consultation on 9 February 2007.

11 If you have any questions about these changes, please contact Paul Phillips on 020 7147 2761 (email: Information about Budget measures is available on the HM Revenue & Customs website at