1. This clause introduces new legislation which disapplies the provisions of Chapter 1A of Part XV of the Income and Corporation Taxes Act 1988 where qualifying income arising to certain UK resident trusts is given to a charity.

2. Chapter 1A of Part XV of the Income and Corporation Taxes Act 1988 is anti-avoidance legislation which prevents individuals from avoiding tax by transferring their assets to others. The new legislation disapplies those provisions to the extent that a trust gives income arising in a year to a charity.

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3. Subsection (1) specifies that Chapter 1A of Part XV of the Income and Corporation Taxes Act (ICTA) 1988 shall not apply to qualifying income arising to a UK resident trust if that income is either given by the trustees to a charity in the year the income arises, or goes to a charity under the terms of the trust. The two alternatives cover trusts in which the trustees have a choice as to whether or not they donate income to charity and those in which the charity is entitled to income under the terms of the trust. "Charity", "qualifying income" and "resident" are defined for the purposes of this clause in subsection (5).

4. Subsection (2) specifies that, subject to subsection (3), where the income arising to the trust during the year is greater than the income given to the charity then the income that goes to the charity is to be treated as made rateably out of all the income that arose to the trust. So, for example, if the trustees receive £100 of bank interest and £100 of rental income during the year and then give £100 to a charity, that £100 will be treated as £50 of rental income and £50 of bank interest.

5. Subsection (3) overrides the rule in subsection (2) where under the terms of the trust the trustees are required to pay all, or a part, of certain sources of income to a charity. So in the example above, if the terms of the trust were such that the trustees were obliged to pay all bank interest arising to the trust to the charity, then the £100 given to the charity will be treated as £100 of bank interest, rather than £50 of bank interest and £50 of rental income.

6. Subsection (4) specifies how trust management expenses are to be given. Trusts caught by Chapter 1A of Part XV of ICTA 1988 get no relief for trust management expenses. So if in the year subsection (1) disapplies Chapter 1A of Part XV of ICTA 1988 in respect of part of the trust income, then any trust management expenses are allocated rateably between the income caught by Chapter 1A of Part XV of ICTA 1988 and income not caught. So if the trust received income of £100 and gave half to charity then half the trust management expenses will be allowable against the half of the income paid to the charity.

7. Subsection (5) provides definitions and make it clear that the apportionment provisions in section 660E ICTA 1988 apply to trusts within the new clause 44. So, for example, if two settlors put assets into one trust section 660E apportions the income arising between the two settlors before the new clause 44 applies to any income given to a charity. The definition of "charity" is the same as that used in the rest of the Taxes Act. "Qualifying income" is defined as income which the trustees have to accumulate, income over which the trustees or others have discretion or income which the trustees receive but before that income is distributed is income of another person. "Resident" has the same meaning as the existing residence test for trustees in section 110 of the Finance Act 1989.

8. Subsection (6) is a commencement provision. The new provisions will apply to qualifying income arising to a UK resident trust on or after 6 April 2000.

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9. The legislation in Chapter 1A of Part XV (Sections 660A to 660G) of ICTA 1988 is anti-avoidance legislation, known as the "settlements" legislation. 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.

10. At present where a trust which is caught by Chapter 1A of Part XV of ICTA 1988 gives income to a charity, either out of choice or under the terms of the trust, then the settlor (the person who settled funds into the trust) is still treated as if they received the income arising to the trust and is taxed accordingly. By contrast an individual giving money to a charity direct gets tax relief. To encourage more people to give more to charity the Government are removing this tax charge on the settlor. Hence resident settlor interested trusts (those within Chapter 1A of Part XV of ICTA 1988) can now donate to charity in much the same way as an individual.

11. These new provisions ensure broadly that settlor interested interested in possession trusts and settlor interested trusts within section 686 of ICTA 1988 are taken outside the provisions in Chapter 1A of Part XV of ICTA 1988 to the extent that income arising to the trustees in the year is given to a charity. The provisions do not apply to bare trusts — that is trusts in which the beneficiaries have an indefeasibly vested interest in the capital and income of the trust — as in such a case any payment by the trustees to a charity would be treated as a payment by the beneficiary and potentially qualify under the Gift Aid provisions.

12. Settlors affected by these changes will no longer need to include on their self assessment returns income which the new provisions take outside the charge to tax in Chapter 1A of Part XV of ICTA 1988. A revised version of the self assessment helpsheet (IR270) will be available later which will explain the changes and help settlors calculate the amounts of taxable income.

13. Paragraphs 14 to 23 below provide examples of how the new provisions will operate.

14. Assume a discretionary trust within section 660A ICTA 1988 receives £100 of bank interest during the year, and also donates £100 to a charity during the same year. Clause 44 disapplies section 660A for that year and so section 686 ICTA 1988 will apply taxing the £100 at 34%. The trustees would be left with £66 after paying tax of £34.

15. The trustees would pay £66 to the charity which under section 687 ICTA 1988 would be treated as a payment of £100 from which tax of £34 had been deducted. The charity can then reclaim the £34 from the Inland Revenue. The settlor would not be taxed under section 660A ICTA 1988 on the £100 of income arising to the trustees.

16. If in the previous example the trustees pay out less than the income arising in the year then section 660A ICTA 1988 will still apply to that part of the income not donated to a charity. So if the income is still £100 but only half is donated to charity then section 660A ICTA 1988 will apply to £50 and section 686 ICTA 1988 will apply to £50. The trustees would therefore pay £33 (£50 less 34% tax) to the charity. The charity can then reclaim the £17 and so receive a total of £50. The settlor will be taxed under section 660A ICTA 1988 on the £50 which is not donated to charity by the trustees.

17. Where the trustees receive different sorts of income and do not give it all to charity then subsection (2) apportions the amount given to the charity rateably in relation to the income received by the trustees. So if in the previous example the trustees received £60 (gross) of rental income and £40 (gross) of bank interest, and donated £50 to charity, then of that £50, £30 will be treated as being out of rental income and £20 as out of interest. The settlor will be taxed in accordance with section 660A ICTA 1988 on £50 under Case VI of Schedule D.

18. Where trustees give more to charity in the year than the total income for that year, then only so much as is covered by income of the year is treated as an income payment. So if the trustees total income in the year is £100, but they give £150 to charity then only £100 will be out of income. In practice the trustees would pay £116 to the charity. That is £66 of income which carries a tax credit of £34 plus £50 which carries no tax credit.

19. It is possible to create an interest in possession trust which benefits a charity and for Chapter 1A of Part XV of ICTA 1988 to apply. Clause 44 applies in basically the same way to resident interest in possession trusts as it does to trusts within section 686 of ICTA 1988, except of course section 686 does not apply.

20. Assume an interest in possession trust within section 660A ICTA 1988 receives bank interest of £100 during the year, and a charity is entitled to the whole of the trust income in the same year. Clause 44 disapplies section 660A ICTA 1988 but section 1A ICTA 1988 still applies taxing the £100 at 20%. The trustees would be left with £80 after paying tax of £20.

21. The trustees would pay £80 to the charity which is treated as a payment of £100 from which tax of £20 has been deducted. The charity can then reclaim the £20 from the Inland Revenue. The settlor would not be taxed under section 660A ICTA 1988 on the £100 of income arising to the trustees.

22. Alternatively the charity may be entitled to a percentage share of the income arising in the year. In that case section 660A ICTA 1988 will apply to the other part of the income. So if the income is still £100 of bank interest but the charity is entitled to one half, then section 660A ICTA 1988 applies to £50 but not to the remaining £50. The trustees would pay £40 (£50 less 20% tax) to the charity. The charity then reclaims the £10 and so receives a total of £50. The settlor is then taxed under section 660A ICTA 1988 on the £50 which is not income of the charity.

23. Where the trustees receive different sorts of income and the charity is entitled to part, subsection (2) again apportions the charity’s share of the income rateably. So if in the previous example the trustees received £60 (gross) of rental income and £40 (gross) of bank interest, then of the £50 which is the charity’s share, £30 will be treated as being out of rental income and £20 as out of interest. Again the settlor will be taxed in accordance with section 660A on £50 under Case VI of Schedule D.

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