This Clause introduces provisions to strengthen the settlements legislation which stops parents avoiding tax by transferring their assets to their minor unmarried children. It applies specifically to those trusts set up by parents on behalf of these children which are treated as bare trusts for tax purposes because the children are entitled to the income and capital of the trusts.

The new provisions mean that, where such a trust is set up on or after 9th March 1999, any income arising therefrom, whether it is accumulated or paid for the benefit of the children, will be taxed as the income of the parents. They will also apply similarly to income from new funds added to existing trusts on or after 9th March 1999. However, the new provisions will not apply if the total income arising from all settlements by the same parent for the same child does not exceed £100 in any year.

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Subsection (1) adds a new subsection (1)(b) to section 660B Income & Corporation Taxes Act (ICTA) 1988 to ensure that income arising to a settlement created for the benefit of a minor unmarried child of the settlor is taxed as the income of the settlor whether or not the income is paid to or for the benefit of the child. This change ensures that section 660B cannot be avoided by using a bare trust arrangement where the child is a beneficiary of the trust.

Subsection (2) amends section 660B(3) Income and Corporation Taxes Act 1988 which contains rules which determine how income arising to a settlement is matched against income paid out of the settlement. The changes ensure that certain income is not treated as part of the retained or available income of the settlement and thus not available to frank any payments out. Income is excluded from the available or retained income if it has been treated as the income of the settlor (section 660B(3)(a)), or is income which is treated as the income of an adult child of the settlor (section 660B(3)(b)) or is income of an unmarried minor child of the settlor and is subject to tax for the years 1995-96 to 1997-98 (section 660B(3)(bb)).

Subsection (3) inserts a new subsection (3A) into section 660B Income and Corporation Taxes Act 1988. The new subsection (3A) provides a definition of the minor unmarried child’s income that is subject to tax for the purposes of section 660B(3)(bb) Income and Corporation Taxes Act 1988.

Subsection (4) replaces the existing section 660B(5) Income and Corporation Taxes Act 1988 with a new subsection (5). Subsection (5) disapplies section 660B where the aggregate income of all settlements by the same parent for the same child is below £100 in any year. The changes to subsection (5) are consequential following the changes made to section 660B(1).

Subsections (5) and (6) are commencement provisions. The revised provisions apply on or after 9th March 1999 (Budget day).

Subsection (7) makes a consequential amendment to section 660E Income and Corporation Taxes Act 1988. Section 660E applies where there is more than one settlor for the same settlement and so income arising to the settlement needs to be apportioned. The changes ensure the rules continue to work properly following the changes to section 660B.

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The anti-avoidance settlements legislation is in Chapter 1A of Part XV (Sections 660A to 660G) of ICTA 1988. Settlements, such as dispositions, trusts, covenants, agreements, arrangements or a transfer of assets are sometimes used by people to avoid tax and this legislation exists to deter that. The rules operate by treating income of a settlement as the income of the settlor for tax purposes under certain circumstances.

It was possible for a parent to avoid the settlements legislation, in section 660B of Part XV of the ICTA Act 1988, by creating a trust for their minor unmarried child in which the child was entitled to the income and capital of the trust. Such a trust is treated as a bare trust for tax purposes. Any income arising to the trust which was not distributed was treated as the child’s even if the funds in the trust came from the parent.

The Government was concerned about the increasing use of savings schemes, principally designed by the financial industry, which incorporated these bare trusts and decided to act. Therefore with effect from Budget Day (9th March 1999) such new trust arrangements will cease to be effective and income arising will be taxed as that of the parent, subject to the £100 limit.

A loophole in the legislation is also being closed with effect from Budget day. This loophole was inadvertently added when the legislation was simplified in 1995 and allowed income accumulated within the trust, which had been treated as the income of a minor child, to be removed from the trust without triggering a tax charge. This loophole is being closed in respect of payments made on or after Budget day.

These changes are a revenue protection measure. It is anticipated that the changes will prevent a future loss of tax of up to £50 million a year.