Income Tax (Trading and Other Income) Act 2005 (c. 5)

(The document as of February, 2008)

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(2) This works as follows.

(3) In this Chapter, in relation to a settlor--

(a) references to the property comprised in a settlement include only property originating from the settlor, and

(b) references to income arising under the settlement include only income originating from the settlor.

(4) For the purposes of sections 629, 631 and 632 only the following are taken into account in relation to a child of the settlor--

(a) income originating from the settlor, and

(b) in a case in which section 631 applies, payments which under that section (as adapted by subsection (5) below) are treated as payments of income.

(5) In applying section 631 to a settlor--

(a) the reference to income arising under the settlement includes only income originating from the settlor, and

(b) the reference to any payment made in connection with the settlement includes only a payment made out of property originating from the settlor or income originating from the settlor.

(6) See section 645 for the meaning of references in this section to property or income originating from a settlor.

645 Property or income originating from settlor

(1) References in section 644 to property originating from a settlor are references to--

(a) property which the settlor has provided directly or indirectly for the purposes of the settlement,

(b) property representing property so provided, and

(c) so much of any property which represents both property so provided and other property as, on a just and reasonable apportionment, represents the property so provided.

(2) References in section 644 to income originating from a settlor are references to--

(a) income from property originating from the settlor, and

(b) income provided directly or indirectly by the settlor.

(3) In this section references to property or income which a settlor has provided directly or indirectly--

(a) include references to property or income which has been provided directly or indirectly by another person under reciprocal arrangements with the settlor, but

(b) do not include references to property or income which the settlor has provided directly or indirectly under reciprocal arrangements with another person.

(4) In this section references to property which represents other property include references to property which represents accumulated income from the other property.

Other supplementary provisions

646 Adjustments between settlor and trustees etc.

(1) A settlor is entitled to recover from--

(a) any trustee, or

(b) any other person to whom the income is payable in connection with the settlement,

the amount of any tax paid by the settlor which became chargeable on the settlor under section 624 or 629.

(2) For this purpose, the settlor may require the Inland Revenue to provide the settlor with a certificate specifying--

(a) the amount of income in respect of which the settlor has so paid tax, and

(b) the amount of tax so paid.

(3) A certificate provided under subsection (2) is conclusive evidence of the facts stated in it.

(4) Subsection (5) applies if--

(a) a settlor obtains a repayment of tax in respect of an allowance or relief, and

(b) the repayment is in excess of the amount of the repayment to which the settlor would have been entitled but for sections 624 to 632.

(5) The settlor must pay an amount equal to the excess to--

(a) the trustee, or

(b) the other person to whom the income is payable by virtue of or as a result of the settlement.

(6) If there are two or more such persons, the amount must be apportioned among them as the case may require.

(7) Any question as to--

(a) the amount of a payment under subsection (5), or

(b) an apportionment to be made under subsection (6),

is to be decided by the General Commissioners whose decision is final.

(8) Nothing in sections 624 to 632 is to be read as excluding a charge to tax on the trustees as persons by whom any income is received.

647 Power to obtain information

(1) The Inland Revenue may by notice require any party to a settlement to provide them, within such period as they may direct, with such particulars as they consider necessary for the purposes of this Chapter.

(2) The period concerned must be not less than 28 days.

648 Income arising under a settlement

(1) References in this Chapter to income arising under a settlement include--

(a) any income chargeable to income tax by deduction or otherwise, and

(b) any income which would have been so chargeable if it had been received in the United Kingdom by a person domiciled, resident and ordinarily resident there.

(2) But this is subject to the rule in subsection (3) which applies if, in a tax year, the settlor is--

(a) not domiciled in the United Kingdom,

(b) not UK resident, or

(3) The rule is that references in this Chapter to income arising under a settlement do not include income arising under the settlement in that tax year in respect of which the settlor, if the settlor were actually entitled to it, would not be chargeable to income tax by deduction or otherwise because of the settlor not being domiciled in the United Kingdom, UK resident or ordinarily UK resident.

(4) Subsection (5) qualifies the rule in subsection (3) if such income is remitted to the United Kingdom in circumstances such that, if the settlor were actually entitled to the income when remitted, the settlor would be chargeable to income tax because of being UK resident.

(5) The income is treated for the purposes of this Chapter as arising under the settlement in the year in which it is remitted.

Chapter 6 Beneficiaries' income from estates in administration

Charge to tax on estate income

649 Charge to tax on estate income

(1) Income tax is charged on estate income.

(2) In this Chapter--

"estate income" means the income treated under this Chapter as arising from an absolute, limited or discretionary interest in the whole or part of the residue of an estate, and
"estate" means the estate of a deceased person (whether a UK estate or a foreign estate).

(3) Estate income is treated as income for income tax purposes.

(4) If different parts of an estate are subject to different residuary dispositions, those parts are treated for the purposes of this Chapter as if they were separate estates.

650 Absolute, limited and discretionary interests

(1) A person has an absolute interest in the whole or part of the residue of an estate for the purposes of this Chapter if--

(a) the capital of the residue or that part is properly payable to the person, or

(b) it would be so payable, if the residue had been ascertained.

(2) A person has a limited interest in the whole or part of the residue of an estate during any period for the purposes of this Chapter if--

(a) the person does not have an absolute interest in it, and

(b) the income from it would be properly payable to the person if the residue had been ascertained at the beginning of that period.

(3) A person has a discretionary interest in the whole or part of the residue of an estate for the purposes of this Chapter if--

(a) a discretion may be exercised in the person's favour, and

(b) on its exercise in the person's favour any of the income of the residue during the whole or part of the administration period (see section 653) would be properly payable to the person if the residue had been ascertained at the beginning of that period.

(4) For the purposes of this section, an amount is only treated as properly payable to a person if it is properly payable to the person, or to another in the person's right, for the person's benefit, except where subsection (5) applies.

(5) The personal representatives of a deceased person ("A") are to be treated as having an absolute or limited interest in the whole or part of the residue of the estate of another deceased person ("B") if--

(a) they have a right in their capacity as A's personal representatives, and

(b) were the right vested in them for their own benefit, they would have that interest in B's estate.

(6) For the purposes of subsection (4), it does not matter whether the amount is payable directly by the personal representatives or through a trustee or other person.

651 Meaning of "UK estate" and "foreign estate"

(1) In this Chapter--

"UK estate", in relation to a tax year, means an estate which meets conditions A and B, or condition C, for that year, and
"foreign estate", in relation to a tax year, means an estate which is not a UK estate in relation to that year.

(2) Condition A is that all the income of the estate either--

(a) has borne United Kingdom income tax by deduction, or

(b) is income in respect of which the personal representatives are directly assessable to United Kingdom income tax for the tax year.

(3) Condition B is that none of the income of the estate is income for which the personal representatives are not liable to United Kingdom income tax for the tax year because they are not UK resident or not ordinarily UK resident.

(4) For the purposes of conditions A and B sums within section 680(3) or (4) (sums treated as bearing tax) are ignored.

(5) Condition C is that the aggregate income of the estate for the tax year consists only of sums within section 680(3) or (4).

Types of estate income

652 Estate income: absolute interests in residue

(1) Income is treated as arising in a tax year from a person's absolute interest in the whole or part of the residue of an estate if--

(a) the person has an assumed income entitlement for the tax year in respect of the interest (see sections 665 to 670), and

(b) condition A or B is met.

(2) Condition A is that a payment is made in respect of the interest in the tax year and before the end of the administration period (see section 653).

(3) Condition B is that the tax year is the final tax year (see section 653).

(4) Income treated as arising as a result of this section is estate income for the purposes of this Chapter.

653 Meaning of "the administration period" and "the final tax year"

(1) In this Chapter "the administration period", in relation to the estate of a deceased person, means the period beginning with the deceased's death and ending with the completion of the administration of the estate.

(2) In the application of subsection (1) to Scotland, the reference to the completion of the administration is to be taken as a reference to the date at which, after discharge of, or provision for, liabilities falling to be met out of the deceased's estate, the free balance held in trust for the residuary legatees or for the persons with the right to the intestate estate has been ascertained.

(3) In this Chapter "the final tax year" means the tax year in which the administration period ends.

654 Estate income: limited interests in residue

(1) Income is treated as arising in a tax year from a person's limited interest in the whole or part of the residue of an estate in cases A, B and C.

(2) Case A is where--

(a) the interest has not ceased before the beginning of the tax year, and

(b) a sum is paid in respect of the interest in that year and before the end of the administration period.

(3) Case B is where--

(a) the tax year is the final tax year,

(b) the interest has not ceased before the beginning of that year, and

(4) Case C is where--

(a) the tax year is a year before the final tax year,

(b) the interest ceases in the tax year, and

(c) a sum is paid in respect of the interest in a later tax year but before the end of the administration period, or remains payable in respect of it at the end of that period.

(5) This section does not apply to limited interests to which section 674 (successive interests: holders of limited interests) applies.

(6) Income treated as arising as a result of this section or section 674 is estate income for the purposes of this Chapter.

655 Estate income: discretionary interests in residue

(1) Income is treated as arising in a tax year from a person's discretionary interest in the whole or part of the residue of an estate if a payment is made in the tax year in exercise of the discretion in that person's favour.

(2) Income treated as arising as a result of this section is estate income for the purposes of this Chapter.

Income charged and person liable

656 Income charged: UK estates

(1) In the case of a UK estate, tax is charged under section 649 on the amount of estate income treated as arising in the tax year.

(2) That amount is the basic amount of that income for the tax year (see subsection (4)) grossed up by reference to the applicable rate for that year (see section 663).

(3) The gross amount is treated as having borne income tax at that rate.

(4) In this Chapter "the basic amount", in relation to estate income, has the meaning given by--

(a) section 660 (basic amount of estate income: absolute interests),

(b) section 661 (basic amount of estate income: limited interests),

(d) section 675 (basic amount of estate income: successive limited interests).

657 Income charged: foreign estates

(1) In the case of a foreign estate, tax is charged under section 649 on the full amount of estate income treated as arising in the tax year.

(2) That amount depends on whether the estate income arising in the tax year is paid from sums within section 680(3) or (4) (sums treated as bearing income tax).

(3) So far as the estate income is paid from such sums, that amount is the basic amount of that income for the tax year grossed up by reference to the applicable rate for that year (see section 663).

(4) That gross amount is treated as having borne income tax at that rate.

(5) So far as the estate income is not paid from sums within section 680(3) or (4), the amount of estate income treated as arising in the tax year is the basic amount of that income for that year.

658 Special rules for foreign income

(1) The charge to tax under section 649 on the amount of income arising in a tax year is subject to Part 8 (foreign income: special rules).

(2) For the purposes of section 830(1) (meaning of "relevant foreign income") amounts charged to tax under section 649--

(a) are treated as arising from a source outside the United Kingdom if the estate is a foreign estate, and

(b) are treated as not arising from such a source if the estate is a UK estate.

659 Person liable

(1) If the estate income is from a person's absolute interest or limited interest, that person is liable for any tax charged under section 649 unless subsection (3) or (4) provides that another person is liable.

(2) If the estate income is from a discretionary interest, the person in whose favour the discretion is exercised in making the payment in question is liable for any tax charged under section 649.

(3) If, in a case where the estate income is from an absolute interest--

(a) section 671 (successive absolute interests) applies, or

(b) section 672 (successive interests: assumed income entitlement of holder of absolute interest following limited interest) applies and the income is treated as arising because of that section,

the person by reference to whose assumed income entitlement the estate income is determined is liable for any tax charged under section 649.

(4) If, in a case where the estate income is from a limited interest--

(a) section 673(1) applies and the income is treated as arising because of section 673(2) (payment in respect of a previous limited interest), or

(b) section 674 (successive interests: holders of limited interests) applies,

the person entitled to receive the payment in question is liable for any tax charged under section 649.

Basic amount of estate income: general calculation rules

660 Basic amount of estate income: absolute interests

(1) The basic amount of estate income relating to a person's absolute interest in the whole or part of the residue of an estate for a tax year before the final tax year is the lower of--

(a) the total of all sums paid in the tax year in respect of that interest, and

(b) the amount of the person's assumed income entitlement for the tax year in respect of it.

(2) The basic amount for the final tax year is equal to the amount of the person's assumed income entitlement for that year in respect of that interest.

(3) But if the residuary income of the estate for the final tax year is nil because the allowable estate deductions exceed the aggregate income of the estate, the basic amount for that year is reduced--

(a) where the person has an absolute interest in the whole of the residue of the estate, by an amount equal to the excess, and

(b) in any other case, by an amount equal to such part of the excess as is just and reasonable.

(4) See sections 665 to 670 for the meaning of references to assumed income entitlement and residuary income of an estate.

(5) See sections 664 and 666(2) for the meaning of aggregate income of an estate and allowable estate deductions respectively.

(6) This section is subject to sections 671 to 673 (successive interests).

661 Basic amount of estate income: limited interests

(1) The basic amount of estate income relating to a person's limited interest in the whole or part of the residue of an estate for a tax year is the total of the sums within section 654(2)(b), (3)(c) and (4)(c) for that year.

(2) This does not apply, and section 675 applies instead, if the limited interest is one to which section 674 (successive interests: holders of limited interests) applies.

662 Basic amount of estate income: discretionary interests

The basic amount of estate income relating to a person's discretionary interest in the whole or part of the residue of an estate for a tax year is the total of the payments made in the tax year in exercise of the discretion in favour of the person.

663 The applicable rate for grossing up basic amounts of estate income

(1) The applicable rate by reference to which a basic amount of estate income is grossed up for the purposes of sections 656 and 657 depends on the rate at which income tax is borne for the tax year by the aggregate income of the estate.

(2) If the aggregate income of the estate all bears income tax at the same rate, the applicable rate is that rate.

(3) If--

(a) different parts of the aggregate income of the estate bear income tax at different rates, and

(b) the same rate applies to all the income from which section 679 treats the basic amount as having been paid,

the applicable rate is that rate.

(4) If--

(a) different parts of the aggregate income of the estate bear income tax at different rates, and

(b) different rates apply to different parts of the income from which section 679 treats the basic amount as having been paid,

each of those rates is the applicable rate by reference to which the corresponding part of the basic amount is grossed up.

664 The aggregate income of the estate

(1) For the purposes of this Chapter the aggregate income of the estate for a tax year is the total of the income and amounts specified in subsection (2), but excluding the income specified in subsection (5).

(2) The income and amounts are--

(a) the income of the deceased's personal representatives in that capacity which is charged to United Kingdom income tax for the tax year,

(b) the income of the deceased's personal representatives in that capacity on which such tax would have been charged for the tax year if--

(i) it was income of a UK resident who was ordinarily UK resident, and

(ii) it was income from a source in the United Kingdom,

(c) any amount of income treated as arising to the personal representatives under section 410(4) (stock dividends) that would be charged to income tax under Chapter 5 of Part 4 if income arising to personal representatives were so charged (see section 411),

(d) in a case where section 419(2) applies (release of loans to participator in close company: loans and advances to persons who die), the amount that would be charged to income tax under Chapter 6 of Part 4 apart from that section, and

(e) any amount that would have been treated as income of the personal representatives in that capacity under section 466 if the condition in section 466(2) had been met (gains from contracts for life insurance).

(3) In calculating the amount of the income within subsection (2)(a), any allowable deductions are to be taken into account.

(4) In calculating the amount of the income within subsection (2)(b), any deductions which would be allowable if the income had been charged to United Kingdom income tax are to be deducted from the full amount of the income actually arising in the tax year.

(5) The excluded income is--

(a) income to which any person is or may become entitled under a specific disposition, and

(b) income from property devolving on the personal representatives otherwise than as assets for payment of the deceased's debts.

(6) In subsection (5)(a) "specific disposition" means a gift of specific property under a will, including--

(a) the disposition of personal chattels by section 46 of the Administration of Estates Act 1925 (c. 23) (succession on intestacy), and

(b) any disposition which under the law of another country has a similar effect to a gift of specific property by will under the law of England and Wales,

but excluding real property included in a residuary gift made by will by a specific or general description of it or, in Scotland, heritable estate included in such a gift.

Further provisions for calculating estate income relating to absolute interests

665 Assumed income entitlement

(1) Whether a person has an assumed income entitlement for a tax year in respect of an absolute interest in the whole or part of the residue of an estate depends on the results of the following steps.

Step 1

Find the amount of the person's share of the residuary income of the estate that is attributable to that interest for that tax year and each previous tax year during which the person had that interest (see sections 666 to 669).

Step 2

If the estate is a UK estate in relation to any tax year for which an amount has been found under step 1, deduct from that amount income tax on that amount at the applicable rate for that year (see section 670).

Step 3

Add together the amounts found under step 1 after making any deductions necessary under step 2.

Step 4

Add together the basic amounts relating to the person's absolute interest in respect of which the person was liable for income tax for all previous tax years (or would have been so liable if the person had been a person liable for income tax for those years).

(2) For the purposes of this Chapter the person has an assumed income entitlement for the tax year if the amount resulting from step 3 exceeds the amount resulting from step 4.

(3) The assumed income entitlement is equal to the excess.

(4) This section is subject to--

section 671 (successive absolute interests), and
section 672 (successive interests: assumed income entitlement of holder of absolute interest following limited interest).

666 The residuary income of the estate

(1) For the purposes of this Chapter the residuary income of an estate for a tax year is the aggregate income of the estate for that year, less the allowable estate deductions for that year.

This is subject to section 669 (reduction in residuary income: inheritance tax on accrued income).

(2) The allowable estate deductions for a tax year are--

(a) all interest paid in that year by the personal representatives in that capacity (but see section 233 of IHTA 1984: exclusion of interest on unpaid inheritance tax),

(b) all annual payments for that year which are properly payable out of residue,

(c) all payments made in that year in respect of expenses incurred by the personal representatives in that capacity in the management of the assets of the estate, and

(d) any excess deductions from the previous tax year.

This is subject to subsections (3) to (5).

(3) No sum is to be treated as an allowable estate deduction if it is allowable in calculating the aggregate income of the estate.

(4) No sum is to be counted twice as an allowable estate deduction.

(5) Payments in respect of expenses are only allowable estate deductions if they are properly chargeable to income (ignoring any specific direction in a will).

(6) In this section "excess deductions from the previous tax year" means so much of the allowable deductions for the previous tax year as exceeded the aggregate income of the estate for that year.

667 Shares of residuary income of estate

(1) In the case of a person who has an absolute interest in the whole of the residue of an estate for a whole tax year, the person's share of the residuary income of the estate in respect of that interest for that year is equal to the whole of that income for that year.

(2) In the case of a person who--

(a) has an absolute interest in the whole of the residue of an estate for part of the tax year, or

(b) an absolute interest in part of the residue of an estate for the whole or part of the tax year,

the person's share of the residuary income of the estate is a proportionate part of that income for that year.

(3) This section is subject to section 668 (reduction in share of residuary income of estate).

668 Reduction in share of residuary income of estate

(1) This section applies if a person has an absolute interest in the whole or part of the residue of an estate at the end of the administration period and--

(a) the total of the person's shares of the residuary income of the estate in respect of that interest for all tax years (apart from this section), exceeds

(b) the total of all sums paid during or payable at the end of the administration period in respect of that interest to any person (grossed up where subsection (5) applies).

(2) In the final tax year the person's share of the residuary income of the estate is to be reduced by that excess.

(3) If that excess is greater than the person's share of that income for the final tax year, that person's share of that income for the previous tax year is to be reduced, and so on.

(4) If subsection (3) applies all necessary adjustments and repayments of income tax are to be made.

(5) For the purposes of calculating the total mentioned in subsection (1)(b)--

(a) if the estate is a UK estate in relation to a tax year in which a sum is paid, the sum is to be grossed up by reference to the basic rate for that year, and

(b) if the estate is a UK estate in relation to the final tax year, a sum payable at the end of the administration period is to be grossed up by reference to the basic rate for that year.

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