SPC00473

Inheritance Tax; accumulation and maintenance trust; effect of assignation of interest by beneficiary; notice of determination; application to vary refused; Inheritance Tax Act 1984 Section 71, 221, 224

THE SPECIAL COMMISSIONERS

	THE TRUSTEES OF THE NEIL ROY CRAWFORD SETTLEMENT	Appellants

	- and -

           
	HER MAJESTY’S REVENUE AND CUSTOMS     	Respondents

			Special Commissioner:     J GORDON REID Q.C., F.C.I.Arb.

Sitting in Edinburgh on 22 March 2005

Colin Tyre QC on behalf of the Appellants

Peter Twiddy, Assistant Director, Capital Taxes Nottingham, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

Introduction

This appeal concerns the question whether an Assignation of an interest in a trust fund gave rise to a charge to tax under section 71(3) of the Inheritance Tax Act 1984.  The appeal was heard at Edinburgh on 23rd March 2005.  Colin Tyre Q.C. appeared on behalf of the Appellants.  Peter Twiddy appeared on behalf of the Respondents (the “Revenue”).  The parties produced bundles of documents, authorities, written Notes of Argument and a Statement of Agreed Facts. 

Facts 

The Statement of Agreed Facts was in the following terms:-

1.	This appeal is concerned with the “Innerhadden Fund” which comprises a part of the property settled by a Settlement (“the 1954 Settlement”) by Neil Roy Crawford dated 25 May 1054 and registered in the Books of Council and Session on 11 January 1968.

2.	By Interlocutor dated 22 March 1984 the Court of Session approved an Arrangement (“the 1984 Arrangement”) varying the purposes of the 1954 Settlement. The trust purposes applicable thereafter to the Innerhadden Fund are those contained in paragraph 2 of the 1984 Arrangement.

3.	In terms of paragraph 2(b) of the 1984 Arrangement, the Appellants wee granted power to determine by Minute the share of the Innerhadden Fund to the income of which any beneficiary would become entitled on attaining age 21.  The trustees have exercised the power as follows:

(i)	By Minute dated 21 and 25 July 1988 they determined that the share of the Fund to the income of which Ruth Allison Barclay would become entitled as £500.

(ii)	By Minute dated 31 October, 2 November and 3 December 1990 they determined that the share of the Fund to the income of which Richard David Barclay would become entitled was the whole of the Fund less £1,000.

4.	Richard David Barclay was born on 27 December 1969.

5.	By Assignation dated 7 March 1989, Richard David Barclay assigned to the Trustees acting under a Deed of Trust by Mrs Sarah Herdman Crawford or Barclay dated 5 January 1989 the whole share and interest in the Innerhadden Fund to which he would become in any way entitled on or after attaining age 21 together with any payments or advances of income or capital falling to him from the Innerhadden Fund on or after attaining age 21.

Paragraph 2 of the 1984 Arrangement provides as follows:-

“2.	With effect from the Operative Date the Trustees shall hold the Innerhadden Fund subject to the following provisions:

(a)	Upon each of the Innerhadden beneficiaries attaining the age of twenty-one years the Trustees shall hold the Innerhadden Fund in such shares as may be determined under paragraph (b) hereof and they shall pay the whole free income of the relevant share as hereinafter defined of each beneficiary from and after his or her attainment of the age of twenty-one years for the duration of his or her life.

(b)	At any time before each of the Innerhadden beneficiaries attains the age of twenty-one years the Trustees may by Minute determine the share of the Innerhadden Fund to the income of which any such beneficiary is to be entitled upon attaining that age in terms of paragraph (a) above (hereinafter referred to as “the relevant share”) provided that in terms of such determination each such share shall amount at least to a sum of £500 and further that if at any time there is only one of the Innerhadden beneficiaries under the age of twenty-one years in life his or her share whether or not it has been determined by the Trustees shall include or comprise such part of the Innerhadden Fund as has not been determined or fixed as the share of any other beneficiary under this or the following paragraph and if no other shares have been determined or fixed it shall comprise the whole of the Innerhadden Fund.  

(c)	In the event of the Trustees having failed to make an effective determination in relation to any of the Innerhadden beneficiaries before the date on which the beneficiary attains the age of twenty-one years the relevant share shall be that fraction of the Innerhadden Fund then remaining in the hands of the Trustees after deduction of such shares as may have been already determined or fixed under this or the preceding paragraph of which the numerator is one and the denominator is the number of Innerhadden beneficiaries then in life in relation to whom no relevant share has been determined or fixed.

(d)	When and so long as any of the Innerhadden beneficiaries are under the age of twenty-one years the trustees shall hold such of the free income of such part of the Innerhadden Fund as remains in their hands and is for the time being not appropriated to any relevant share and held for a beneficiary who has attained the age of twenty-one years and they may pay or apply the whole or such part of such income as they may from time to time determine for the maintenance, education or benefit of any one or more of the Innerhadden beneficiaries who is or are for the time being under the age of twenty-one years and they shall accumulate so much of the said income as is not applied for the foregoing purposes and add the same to such part of the capital of the Innerhadden Fund as is for the time being not appropriated to any relevant share as aforesaid.

(e)	Upon the death of any of the Innerhadden beneficiaries the Trustees shall pay and convey the capital of his or her relevant share toot among such one or more of the surviving Innerhaden beneficiaries or of the lawful children of any of the Innerhadden beneficiaries being Qualified Issue as the Trustees may in their absolute discretion determine, provided that if any of the Innerhadden beneficiaries should die before the relevant share of such beneficiary has been determined or fixed the Trustees shall thereupon determine that share in accordance with paragraph (b) hereof as if such beneficiary was still in life and thereafter pay and convey the capital thereof in accordance with the provisions of this paragraph.

(f)	Notwithstanding the forgoing the Trustees shall have power in their discretion at any time or from time to time to advance to any of the Innerhadden beneficiaries or to any of the lawful children of any of the Innerhadden beneficiaries being Qualified Issue provided always that such person, whether one of the Innerhadden beneficiaries or any child of them, shall have obtained the age of twenty-one years the whole or any part of such of the Innerhadden Fund as is for the time being held by the Trustees for the liferent of the beneficiary to whom the advance is made or his or her parent in terms of paragraph (a) hereof, either subject to any liferent interest than attaching thereto or free from any liferent interest and that for any purpose which the Trustees may consider beneficial to him or her all as they in their absolute discretion may decide and any advances of capital made under this paragraph shall vest absolutely in the person to whom the same is made at the date of the making of the same.

(g)	In the event of any part of the income or capital of the Innerhadden Fund not being disposed of in accordance with the foregoing paragraphs of this Article whether through a failure of issue of the Innerhadden beneficiaries or for any other reason whatsoever the Trustees shall hold and apply the same for the purposes set out in Purpose (2) of the Settlement.

3.	Except in so far as concerns the Innerhadden Fund so long as it is subject to the provisions set out in paragraphs (a) to (g) of the foregoing Article and in addition to and without prejudice to the existing powers of the Trustees under the Settlement the Trustees shall have power at any time and from time to time by Deed or Deeds revocable or irrevocable to appoint that all or any part or share of the Trust Funds shall be held for such purposes and with and under such provisions (including discretionary trusts, provisions for accumulation during minority, liferents or interests in income) and in such manner generally in favour or for the benefit of all or any one or more to the exclusion of the others or other of the Qualified Grandchildren and Qualified Issue all as the Trustees may in their absolute discretion determine, having due regard to Section 18 of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1968, declaring further that without prejudice to the foregoing generality the Trustees may exercise the foregoing power to the effect that a part or share of the Trust Funds shall be added to the Innerhadden Fund or to such shares or parts of that fund as they may declare and on any such appointment being made they shall hold such part or share as an accretion to the Innerhadden Fund or to such share or part of that Fund as they may have declared and hold and apply the same in accordance with such of paragraphs (a) to (g) of the foregoing Article as may be relevant thereto.”

The Barclay Trust, to which Richard’s interest was assigned, is a discretionary trust in which no interest in possession subsists.

Legislation

Section 71 of the Inheritance Tax Act 1984 provides as follows:-

71 Accumulation and maintenance trusts 

(1) Subject to subsection (2) below, this section applies to settled property if— 

		(a)	   one or more persons (in this section referred to as beneficiaries) will [emphasis added], on or before attaining a specified age not exceeding twenty-five, become beneficially entitled to it or to an interest in possession in it, and 

	

		(b)	   no interest in possession subsists in it and the income from it is to be accumulated so far as not applied for the maintenance, education or benefit of a beneficiary. 

	

(2) This section does not apply to settled property unless either— 

		(a)	   not more than twenty-five years have elapsed since the commencement of the settlement or, if it was later, since the time (or latest time) when the conditions stated in paragraphs (a) and (b) of subsection (1) above became satisfied with respect to the property, or 

	

		(b)	   all the persons who are or have been beneficiaries are or were either— 

	

		(i)	   grandchildren of a common grandparent, or 

	

		(ii)	   children, widows or widowers of such grandchildren who were themselves beneficiaries but died before the time when, had they survived, they would have become entitled as mentioned in subsection (1)(a) above 

	

(3) Subject to subsections (4) and (5) below, there shall be a charge to tax under this section— 

		(a)	   where settled property ceases to be property to which this section applies, and 

	

		(b)	   in a case in which paragraph (a) above does not apply, where the trustees make a disposition as a result of which the value of settled property to which this section applies is less than it would be but for the disposition. 

	

(4) Tax shall not be charged under this section— 

		(a)	   on a beneficiary’s becoming beneficially entitled to, or to an interest in possession in, settled property on or before attaining the specified age. 

	

		(b)	   on the death of a beneficiary before attaining the specified age. 

	

(5) Subsections (3) to (8) and (10) of section 70 above shall apply for the purposes of this section as they apply for the purposes of that section (with the substitution of a reference to subsection (3)(b) above for the reference in section 70(4) to section 2(2)(b)). 

(6) Where the conditions stated in paragraphs (a) and (b) of subsection (1) above were satisfied on 15th April 1976 with respect to property comprised in a settlement which commenced before that day, subsection (2)(a) above shall have effect with the substitution of a reference to that day for the reference to the commencement of the settlement, and the condition stated in subsection (2)(b) above shall be treated as satisfied if— 

		(a)	   it is satisfied in respect of the period beginning with 15th April 1976, or 

	

		(b)	   it is satisfied in respect of the period beginning with 1st April 1977 and either there was no beneficiary living on 15th April 1976 or the beneficiaries on 1st April 1977 included a living beneficiary, or 

	

		(c)	   there is no power under the terms of the settlement whereby it could have become satisfied in respect of the period beginning with 1st April 1977, and the trusts of the settlement have not been varied at any time after 15th April 1976. 

	

(7) In subsection (1) above “persons” includes unborn persons; but the conditions stated in that subsection shall be treated as not satisfied unless there is or has been a living beneficiary. 

(8) For the purposes of this section a person’s children shall be taken to include his illegitimate children, his adopted children and his stepchildren. 

Other relevant statutory provisions are appended hereto.

Notices of Determination

By Notices dated 27th August 2004 the Revenue determined, under section 221 of the 1984 Act that the Assignation gave rise to a charge to tax under section 71(3) of that Act on the value of the settled property comprising the Innerhadden Fund, less the sum of £500.  The determination is resisted on the ground that the settled property in which Richard’s interest subsisted, did not, as a consequence of the Assignation, cease to be property to which section 71 applied.

Submissions

Mr Tyre submitted that the question of interpretation was whether section 71(3) of the 1984 Act was concerned with any contingency which might result in one or more persons not becoming entitled to the settled property before attaining the age of 25, or whether it was concerned only with contingencies arising from the provisions of the settlement itself.  That latter view was supported by Inglewood v CIR 1983 STC 133 (CA) at 138F-G.  Although not binding in Scotland, Inglewood should be followed unless there are compelling reasons to the contrary (Abbott v Philbin 39 TC 82 per Lord Evershed MR at 112; approved in the House of Lords at 118 per Viscount Simonds and 122 per Lord Reid.  Mr Tyre reviewed the history of the legislation in relation to discretionary trusts; he abandoned an argument noted in his Note of Argument because he acknowledged that section 71 of the 1984 Act was not a pure consolidating provision.  However, the decision at first instance in Inglewood was issued on 13/2/81 and Parliament, in enacting section 114 of the Finance Act 1982 (which re-enacted the relevant part of schedule 5 to the 1975 Act with modifications), must be taken to be aware of Vinelott J’s decision (R v Governor of Brixton Prison ex p de Demko 1959 1 QB 268 per Lord Evershed MR at 281).  He also sought support from the latest edition of Dymond Capital Taxes paragraphs  21.311, & 313-316 which notes that section 71(1)(a) of the 1984 Act which reproduced the relevant part of section 114 of the Finance Act 1982, was not intended to change the law on the meaning  of “will”.

Mr Tyre further submitted that when the Assignation took place no share had been determined to be due to Richard.  It was therefore impossible to tell at the date of the Assignation what share would be disqualified from meeting the conditions of section 71; and nothing changed as a consequence of the Assignation.  The possibility of assignation always existed; if that were sufficient no trust would ever meet the conditions of section 71.  For that reason Inglewood was decided in the way it was.

Mr Twiddy submitted that Inglewood was, in effect, not in point as it dealt with the position where an assignation might take place, whereas here we are concerned with an assignation that has taken place.  In Inglewood the trust was flawed from the beginning.  Mr Twiddy also reviewed the history of the legislation.  He emphasised that the charging provisions directed one to an event (e.g. 1975 Act Schedule 5 paragraphs 6(1)-(3), and 12); these were in contrast to paragraph 15 which directs one to have regard to the terms of the trust.  Since the changes in section 114 of the 1982 Act the emphasis has been on a consideration of the property held on trust and the nature of the terms of the trust applicable from time to time (see 1984 Act sections 58(1) and 71(1)).  He pointed out that the 1982 Act was passed while Inglewood was under appeal.  It would be presumptions of Parliament to assume that Vinelott J’s decision would be upheld or overruled.  

His submissions, he said, were consistent with the purposive approach to legislation.  The appellant’s argument would lead to the conclusion that if all the children assigned their interests to relevant property trusts, the present trust (NR Crawford’s Settlement) would still be an accumulation and maintenance trust.  If all the interests were held by different trusts it would no longer be an accumulation and maintenance trust.  Mr Twiddy also relied on Thomas v IRC 1981 STC 382 for the proposition that an assignation could create a sub-settlement.

Here, the relevant event was the 1990 Minute.  When it was pointed out to Mr Twiddy that the Notices of Determination made no mention of the 1990 Minute and relied solely on the Assignation, he invited me to exercise my powers under section 224(5) of the 1984 Act to vary the Notice of Determination so as to make reference to the 1990 Minute.  If the Revenue have chosen the wrong event to found upon in the Notice of Determination, one was still left with the view that the necessary degree of certainty did not exist because there was, as a result of the Assignation, a different factual matrix.  There was a real possibility that the requirements of section 71 will not be met.  Mr Twiddy acknowledged that this was a weaker argument.

In response to the proposal that the Notices of Determination be varied so as to refer to the 1990 Minute, Mr Tyre objected.  He had prepared and presented his case on the basis of the Notice of Determination which referred only to the Assignation.  He had not considered and presented argument on the effect of the 1990 Minute.  The Revenue’s argument had been intimated late and paragraph 7 thereof had been the first inkling that the Revenue intended to found on the 1990 Minute as well as the Assignation.

Discussion

The significant events for present purposes are (i) the creation of the accumulation and maintenance trust in 1984, (ii) the 1988 Minute by which Ruth’s share of the Fund, to the income of which she would become entitled, was determined, (iii) the Assignation in 1989, (iv) the 1990 Minute by which Richard’s share of the Fund, to the income of which he would become entitled, was determined, and (v) Richard’s 21st Birthday on 27/12/90.  The critical events are (iii) and (iv).

The Notices of Determination do not refer to the 1990 Minute.  Although I have power to vary a Notice of Determination under section 224(5) of the 1984 Act, to do so in this appeal would radically alter the nature of the dispute between the parties.  The appellants have prepared and presented their appeal on the basis that the only case they had to deal with was the effect of the Assignation.  It would be unfair to the appellants if I were to allow the Notices of Determination to be amended as proposed.  Mr Tyre was not in a position to present argument in relation to the 1990 Minute when the appeal was heard.  I considered the possibility of inviting written submissions but it seemed to me that this would not be satisfactory because the whole focus of the appeal would change.  I therefore decline to allow the Notices of Determination to be varied.

This leaves Mr Twiddy, as he recognised, with a much more restricted argument.  The starting point is the effect of the Assignation.  I agree with Mr Tyre’s submission that the Assignation changed nothing.  That is the short answer to the issues in this appeal.  Immediately after the Assignation, the trust comprised exactly the same property as immediately before the Assignation; and viewing matters as at the date the Assignation took effect, one or more persons “will” on or before attaining the age of 21 become beneficially entitled to an interest in possession in it.  The conditions set forth in section 71(1) were met immediately after the Assignation took effect in the same way they were met immediately before the Assignation took effect.  It cannot therefore be said that settled property ceased to be property to which section 71 applied by virtue of the effect of the Assignation.  It follows that the Assignation did not give rise to a charge to tax under section 71(3) of the 1984 Act.

Both parties referred to Inglewood.  It concerned a settlement for B’s children born by the date the eldest child attained 21 years or had married.  There were five children within the class when the eldest attained 21 years.  The trustees had a power of revocation and reappointment under which a beneficiary’s interest could be destroyed and reappointed to another person at the absolute discretion of the trustees.  After the eldest child became 21, the trustees released the power of revocation. The Revenue argued that a charge to tax arose firstly on the eldest child attaining the age of 21 and secondly on the remainder of the trust property when the trustees released their power of revocation, because until the power of revocation was released the trust did not satisfy the statutory provisions which gave relief from the charge to tax.  The appeal turned on the interpretation of the statutory phrase contained in paragraph 15(1) to Schedule 5 of the Finance Act 1975 (“This paragraph applies to any settlement where – (a) one or more persons (….beneficiaries) will on or before attaining a specified age not exceeding twenty five…, become entitled to, or an interest in possession in, the settled property… and (b) no interest in possession subsists in the settled property … and the income from it is to be accumulated so far as not applied for the maintenance education or benefit of a beneficiary”).  The Revenue’s argument, that having regard to the power of revocation it could not be postulated of any beneficiary that he or she “will” on or before attaining the requisite age become entitled to or an interest in possession in the trust fund, was accepted at first instance by Vinelott J and by the Court of Appeal.  The Trustees had argued that if the Revenue were correct the relief could never be given because inter alia a beneficiary’s interest could be assigned before attaining the requisite age.  The Court’s answer to this was that the statutory relief was concerned only with provisions which were contained in the settlement itself (138g).  The consequences of the general law on property interests were therefore irrelevant when one was considering possible events in which a beneficiary might be prevented from attaining a vested interest (141j).  I doubt, however, whether Inglewood is in point.  It seems to me that it was dealing with possibilities rather than the effect of actual events.  I readily acknowledge that there is no compelling reason not to apply its ratio insofar as in point (Abbott above).  I did not find the other authorities cited to be of any great assistance.

I express no opinion on the effect of the 1990 Minute.  That issue may require to be adjudicated upon on another occasion if the Revenue issue further notices of determination.

Disposal

The appeal will be allowed and the Notices of Determination quashed.

J GORDON REID Q.C.,F.C.I.Arb.
SPECIAL COMMISSIONER
Release Date: 25 April 2005

SC 3126/2004

APPENDIX

Finance Act 1975, Schedule 5

Charge on capital distributions of settled property 		

	6.--(1) Where a distribution payment is made out of property comprised in a settlement and at the time the payment is made no interest in possession subsists in the property or in the part of it out of which the payment is made, the payment is in this Schedule referred to as a capital distribution.		

	(2) Where a person becomes entitled to an interest in possession in the whole or any part of the property comprised in a settlement at a time when no such interest subsists in the property or that part, a capital distribution shall be treated as being made out of the property or that part of the property; and the amount of the distribution shall be taken to be equal to the value at that time of the property or, if the interest is in part only of that property, of that part.		

	(3) Where, at a time when no interest in possession subsists in property comprised in a settlement or in a part of that property, a transaction is made between the trustees of the settlement and a person who is, or is connected with,--		

	(a)	
 	
a person beneficially entitled to an interest in any of the settled property; or	

	(b)	
 	
a person for whose benefit any of the settled property may be applied;	

	and, as a result of the transaction, the value of the property or part is less than it would be but for the transaction, a capital distribution shall be treated as being made out of the property or part of an amount equal to that by which that value is less, unless the transaction is such that, were the trustees beneficially entitled to the settled property, it would not be a transfer of value.		

	(4) Tax shall be charged on any capital distribution as on the value transferred by a chargeable transfer where--		

	(a)	
 	
the value transferred less the tax payable on it is equal to the amount of the capital distribution; and	

	(b)	
 	
the rate applicable is that specified in paragraphs 7 to 9 below;	

	and in those paragraphs "the assumed transferor" means the person who would be the transferor in relation to the chargeable transfer assumed by this sub-paragraph and the appropriate Table for the purposes of those paragraphs (including the calculation of any tax that would have been chargeable as mentioned in paragraph 7(2)(a) below) is the Second Table set out in section 37(3) of this Act.		

	(5) The reference in sub-paragraph 4(a) above to the tax payable on a capital distribution does not include any tax which is payable by a person to whom a distribution payment is made; and in relation to a capital distribution treated as made under sub-paragraph (2) 		

	or (3) above or paragraph 12, 15(3) or 24(2) below, sub-paragraph (4)(a) above shall have effect as if the words "less the tax payable on it" were omitted.		

	(6) Notwithstanding sub-paragraph (1) above, a distribution payment which is made to the settlor or the settlor's spouse shall not be a capital distribution if the settlor or, as the case may be, the settlor's spouse is domiciled in the United Kingdom at the time the payment is made and resident (within the meaning of the Income Tax Acts) in the United Kingdom in the year of assessment in which it is made.		

	(7) Sub-paragraph (2) above shall not be taken to apply in the case of a person who, on surviving another person for a specified period, becomes entitled to an interest in possession as from the other person's death.		

	(8) Where a person entitled to an interest in possession in part of the property comprised in a settlement became so entitled as a member of a class, sub-paragraph (2) above shall not apply on his becoming entitled, as such a member, to an interest in possession in another part of that property, if he becomes so entitled on the death under full age of another member of that class.		

	Rates of charge on capital distributions following chargeable transfers 		

	7.--(1) This paragraph applies where, at or after the relevant time and before the capital distribution, there has been a transfer of value which satisfies the conditions stated in paragraph 11(2) below.		

	(2) So far as the amount on which tax is chargeable, when added to the amount of all previous distribution payments made out of property comprised in the settlement, does not exceed the initial value, the rate chargeable shall be equal to the fraction of which--		

	(a)	
 	
the numerator is the amount of the tax which would have been charged on the value transferred by the relevant transfer, or such part of that amount as is attributable to the initial value, if the value so transferred had been equal to the aggregate of the initial values of the settlement and any related settlement; and	

	(b)	
 	
the denominator is the initial value.	

	(3) So far as the amount on which tax is chargeable, when so added, exceeds the initial value, the rate or rates chargeable shall be the rate or rates that would be applicable if the assumed transferor had made previous chargeable transfers and the aggregate of the values transferred by them were equal to the aggregate of--		

	(a)	
 	
the values transferred by any chargeable transfers which the person who made the relevant transfer had made before the relevant transfer;	

	(b)	
 	
the aggregate of the initial values of the settlement and any related settlement; and	

	(c)	
 	
the amounts of any previous distribution payments out of property comprised in the settlement, so far as the tax (if any) chargeable thereon is chargeable in accordance with this sub-paragraph.	

	Rate of charge on other capital distributions 		

	8.--(1) This paragraph applies where paragraph 7 above does not apply.		

	(2) The rate or rates chargeable shall be the rate or rates that would be applicable if the assumed transferor--		

	(a)	
 	
had made previous chargeable transfers in any case where there had been previous distribution payments made on or after 27th March 1974 out of the settled property; but	

	(b)	
 	
had made no previous chargeable transfers in any other case;	

	and, where paragraph (a) above applies, the aggregate of the values transferred by the previous chargeable transfers were equal to the aggregate amounts of the previous distribution payments mentioned therein.		

	Further property added by settlor 		

	9.--(1) The following provisions of this paragraph apply where, by a transfer of value made by the settlor at any time after the making of the settlement and after 26th March 1974 (in this paragraph referred to as "the subsequent transfer") further property is added to the property comprised in the settlement immediately before the subsequent transfer (in this paragraph referred to as "the previous property").		

	(2) The subsequent transfer shall be treated for the purposes of paragraphs 6 to 8 above as the making of a separate settlement and the further property as property comprised in that separate settlement, and the following provisions of this paragraph shall apply for determining the property out of which any capital distributions made after the subsequent transfer are to be treated as made.		
	(3) If paragraph 7 above would have applied to a capital distribution made immediately before the subsequent transfer, any capital distribution made after the subsequent transfer shall be treated as made--		

	(a)	
 	
out of the previous property, if or to the extent that the amount of the distribution, when added to the amount of all previous distribution payments made out of the settled property, does not exceed the previous value defined in sub-paragraph (4) below; and	

	(b)	
 	
out of the further property in any other case.	

	(4) For the purposes of sub-paragraph (3) above the previous value is the initial value, increased, if there was an earlier transfer which is a "subsequent transfer" as defined above, by the value, immediately after the earlier transfer, of any property added by it to the settled property.		

	(5) If paragraph 7 above would not have applied to a capital distribution made immediately before the subsequent transfer, any capital distribution made after the subsequent transfer shall be treated as made--		

	(a)	
 	
out of the previous property, if or to the extent that the amount of the distribution, when added to the amount of any previous distribution payment made since the subsequent transfer, does not exceed the value of the settled property immediately before the subsequent transfer; and	

	(b)	
 	
out of the further property in any other case;	

	and accordingly, where paragraph (b) above applies, the rate or rates chargeable shall be determined in accordance with paragraph 7 above (and, where there is a further subsequent transfer, in accordance with sub-paragraphs (3) and (4) above).		

	Capital distributions after termination of interest of settlor or settlor's spouse 		

	10. Where, after the termination of an interest in possession in a part (in this paragraph referred to as the chargeable part) of any property comprised in a settlement made after 26th March 1974, a capital distribution is made out of the chargeable part, and--		

	(a)	
 	
the settlor or the settlor's spouse was the person entitled to the interest before its termination, and either the settlor or the settlor's spouse was entitled to an interest in possession in the chargeable part immediately after the making of the settlement; and	

	(b)	
 	
the making of the settlement either was not a transfer of value or was an exempt transfer or a transfer exempt to the extent of the value of the chargeable part;	

	paragraphs 6 to 9 above shall apply as if the chargeable part were comprised in a separate settlement made by the person entitled to the first-mentioned interest on its termination and the termination of the interest were the relevant transfer; and as if the subsequent termination of any interest of his in any other part of the settled property were an addition made by him to the property comprised in that separate settlement.		

	Interpretation of paragraphs 6 to10 		

	11.--(1) The following provisions apply for the interpretation of paragraphs 6 to 10 above.		

	(2) The relevant transfer, in relation to any settlement, is the first transfer of value made at or after the relevant time which satisfies the conditions--		
	(a)	
 	
that the value of the property comprised in the settlement or of that part of it out of which the capital distributions are made was taken into account in determining the value transferred; and	

	(b)	
 	
that the transfer was, or would but for paragraph 19(2) below or paragraphs 2 to 7 of Schedule 6 to this Act have been, a chargeable transfer; and	

	(c)	
 	
that, if the settlement was made before 27th March 1974, the transfer was made neither under paragraph 4 above nor on death;	

	and where it was not a chargeable transfer the reference in paragraph 7(2)(a) above to the tax which would have been charged is a reference to the tax which would have been charged but for paragraph 19(2) below or paragraphs 2 to 7 of Schedule 6 to this Act.		

	(3) The relevant time, in relation to any settlement, is, if the settled property became comprised in the settlement on the death of any person, the time immediately before his death, and, in any other case, the time when the settlement was made.		

	(4) Where, by the same disposition, property ceases to be comprised in one settlement and becomes comprised in another settlement, the property shall be treated as remaining comprised in the first settlement.		

	(5) The amount of any distribution payment which is a capital distribution shall be taken (except for the purposes of paragraph 6(4)(a)) to be the amount on which tax is chargeable in respect of it.		

	(6) A settlement is related to another if the same transfer of value is the relevant transfer in relation to both; and for this purpose transfers of value made by the same person on the same day shall be treated as one.		

	(7) "Distribution payment" means, subject to sub-paragraph (8) below, any payment which--		

	(a)	
 	
is not income of any person for any of the purposes of income tax and would not for any of those purposes be income of a person not resident in the United Kingdom if he were so resident; and	

	(b)	
 	
is not a payment in respect of costs or expenses;	

	and "payment" includes the transfer of assets other than money.		

	(8) The amount of any capital distribution treated as made under paragraph 6(2) or (3) above or paragraph 15(3) or 24(2) below shall also be deemed to be a distribution payment; but where, after an amount has been taken into account by virtue of this sub-paragraph as a distribution payment made out of the whole or part of any property, one or more distribution payments are made (otherwise than under this sub-paragraph) out of that property or part, the amount so taken into account shall be treated as reducing the amount of those payments.		

	(9) "Initial value", in relation to any settlement, means the value, immediately after the relevant transfer, of the property then comprised in the settlement.		

	(10) "Interest in possession" means an interest in possession to which an individual is beneficially entitled or, if the following conditions are satisfied, an interest in possession to which a company is beneficially entitled, the conditions being--		

	(a)	
 	
that the business of the company consists wholly or mainly in the acquisition of interests in settled property; and	

	(b)	
 	
that the company has acquired the interest for full consideration in money or money's worth from an individual who was beneficially entitled to the interest.	

	(11) References to settled property shall be construed as referring only to property which is not excluded property.		

	Periodic charge to tax 		

	12.--(1) Where, at a relevant anniversary, no interest in possession subsists in the property comprised in a settlement or in a part of that property, a capital distribution of an amount equal to the value immediately before that anniversary of that property or part shall be treated as made out of that property or part, and tax shall be charged on a capital distribution so treated as made at 30 per cent. of the rate at which it would be chargeable under paragraphs 6 to 10 above on a capital distribution of the same amount made at the same date, but subject to any reduction under sub-paragraph (4) below.		

	(2) Where the trustees of the settlement are not resident in the United Kingdom a capital distribution of a corresponding amount shall also be treated as made if no interest in possession subsists in the property or in a part thereof at the end of any year in the period of ten years ending with a relevant anniversary, except the last and except any year ending before 1st January 1976; and tax shall be charged on a capital distribution so treated as made at 3 per cent. of the rate at which it would be chargeable under paragraphs 6 to 10 above on a capital distribution of the same amount made at the same date.		

	(3) Any tax charged by virtue of sub-paragraph (2) above shall be allowed as a credit against the tax chargeable on the next capital distribution made, or treated by virtue of sub-paragraph (1) above as made, out of the property or, as the case may be, out of the part concerned.		

	(4) Where the whole or part of the value mentioned in sub-paragraph (1) above is attributable to property--		

	(a)	
 	
which was added by the settlor after the end of the first of the ten years ending with the relevant anniversary; or	

	(b)	
 	
in which an interest in possession subsisted throughout at least one of those ten years;	

	the rate at which, under sub-paragraph (1) above, tax is chargeable on that value or that part of it shall be reduced by one-tenth for each of those ten years throughout which either the settled property did not include that property, or an interest in possession subsisted in that property.		

	(5) For the purposes of this paragraph trustees of a settlement shall be regarded as not resident in the United Kingdom unless the general administration of the settlement is ordinarily carried on in the United Kingdom and the trustees or a majority of them (and, where there is more than one class of trustees, a majority of each class) are for the time being resident in the United Kingdom.		

	(6) For the purposes of this paragraph a relevant anniversary, in relation to a settlement, is the end of the ten years beginning with the date of the transfer of value which is the relevant transfer in relation to the settlement (or would be the relevant transfer in relation to it if dispositions made or events happening at that date could be chargeable transfers and paragraph (c) of paragraph 11(2) above were omitted) and the end of every subsequent ten years; but no date falling before 1st April 1980 is a relevant anniversary.		

	(7) In this paragraph expressions defined for the purposes of paragraphs 6 to 10 above have the same meanings as in those paragraphs.		

	(8) Section 51(2) of this Act does not apply to a charge to tax under this paragraph so as to make it the relevant transfer in relation to any settlement.

	Tax credit for periodic charge 		
	13.--(1) Subject to sub-paragraph (2) below, where tax is charged at a relevant anniversary on any capital distribution treated by virtue of paragraph 12(1) above as made out of any property, the effective rate at which that tax is charged (taking into account any reduction under paragraph 12(4) above) shall reduce the rate at which, apart from this paragraph, tax would be chargeable on any capital distribution made out of that property on or not later than twenty years after that relevant anniversary.		

	(2) The amounts by which tax on any capital distribution is reduced under sub-paragraph (1) above by reason of any tax charged under paragraph 12(1) above shall not together exceed the amount of the tax so charged.		

	(3) In this paragraph "relevant anniversary" has the same meaning as in paragraph 12 above.		

	Transitional relief for settlements made before 27th March 1974 		

	14.--(1) In relation to a settlement made before 27th March 1974 paragraphs 6 to 12 above shall apply with the following modifications.		

	(2) Subject to sub-paragraphs (3) to (5) below, the rate at which tax is chargeable on any capital distribution made before 1st April 1980 out of property comprised in the settlement (but not on any capital distribution which, under paragraph 9 above, is treated as made out of property comprised in a separate settlement made after 26th March 1974) shall be the following percentage of the rate at which it would be chargeable apart from this paragraph, that is to say--		

	(a)	
 	
10 per cent. if the capital distribution is made before 1st April 1976;	

	(b)	
 	
12½ per cent. if it is made after 31st March 1976 but before 1st April 1977;	

	(c)	
 	
15 per cent. if it is made after 31st March 1977 but before 1st April 1978;	

	(d)	
 	
17½ per cent. if it is made after 31st March 1978 but before 1st April 1979; and	

	(e)	
 	
20 per cent. if it is made after 31st March 1979.	

	(3) Where any capital distribution made after 31st March 1976 but before 1st April 1977 could not have been made except as the result of some proceedings before a court, this paragraph shall have effect in relation to it as if it had been made before 1st April 1976.		

	(4) Sub-paragraph (2) above does not apply in relation to a capital distribution treated as made under paragraph 12(2) above.		

	(5) Sub-paragraph (2) above does not apply--		

	(a)	
 	
in relation to a capital distribution treated as made under paragraph 6(2) 	

	above, unless the person becoming entitled as mentioned therein; or		

	(b)	
 	
in relation to a capital distribution treated as made under paragraph 15(3) below, unless each of the beneficiaries referred to therein; or	

	(c)	
 	
in relation to a distribution payment made for the benefit of any person, unless that person;	

	is an individual who is domiciled in the United Kingdom at the time the capital distribution is made and resident (within the meaning of the Income Tax Acts) in the United Kingdom in the year of assessment in which it is made.		

	(6) In this paragraph expressions defined for the purposes of paragraphs 6 to 10 above have the same meanings as in those paragraphs.		

	Accumulation and maintenance settlements 		

	15.--(1) This paragraph applies to any settlement where--		

	(a)	
 	
one or more persons (in this paragraph referred to as beneficiaries) will, on or before attaining a specified age not exceeding twenty-five, become entitled to, or to an interest in possession in, the settled property or part of it; and	

	(b)	
 	
no interest in possession subsists in the settled property or part and the income from it is to be accumulated so far as not applied for the maintenance, education or benefit of a beneficiary.	

	(2) Where this paragraph applies to a settlement--		

	(a)	
 	
a payment made to a beneficiary out of the settled property or part concerned shall not be a capital distribution and a capital distribution shall not be treated as made under paragraph 6(2) above on a beneficiary's becoming entitled to an interest in the property or part; and	

	(b)	
 	
no capital distribution shall be treated as made out of the property or part by virtue of paragraph 12 above at any time during the period for which the income is to be accumulated as mentioned in sub-paragraph (1)(b) above.	

	(3) Where no interest in possession subsists in the property comprised in a settlement or some part of that property but the conditions stated in paragraphs (a) and (b) of sub-paragraph (1) above are not satisfied with respect to the property or part, then, if those conditions become satisfied with respect to the property or any part thereof a capital distribution shall be treated as being made out of the property or part and the amount of the distribution shall be taken to be equal to the value of the property with respect to which those conditions become satisfied.		

	(4) Where the conditions stated in paragraphs (a) and (b) of sub-paragraph (1) above are satisfied at any time when there is only one beneficiary, they shall not be treated as ceasing to be satisfied on his death or on his attaining the specified age, if they would again be satisfied on the birth of another person.		

	(5) In this paragraph expressions defined for the purposes of paragraphs 6 to 10 above have the same meanings as in those paragraphs.		

Finance Act 1982

114.--(1) Subject to subsection (2) below, this section applies to settled property if--		

	(a)	
 	
one or more persons (in this section referred to as beneficiaries) will, on or before attaining a specified age not exceeding twenty-five, become beneficially entitled to it or to an interest in possession in it, and	

	(b)	
 	
no interest in possession subsists in it and the income from it is to be accumulated so far as not applied for the maintenance, education or benefit of a beneficiary.	

	(2) This section does not apply to settled property unless either--		
	(a)	
 	
not more than twenty-five years have elapsed since the commencement of the settlement or, if it was later, since the time (or latest time) when the conditions stated in paragraphs (a) and (b) of subsection (1) above became satisfied with respect to the property, or	

	(b)	
 	
all the persons who are or have been beneficiaries are or were either--	

	(i) grandchildren of a common grandparent, or		

	(ii) children, widows or widowers of such grand-children who were themselves beneficiaries but died before the time when, had they survived, they would have become entitled as mentioned in subsection (1)(a) above.		

	(3) Subject to subsections (4) and (5) below, there shall be a charge to tax under this section--		

	(a)	
 	
where settled property ceases to be property to which this section applies, and	

	(b)	
 	
in a case in which paragraph (a) above does not apply, where the trustees make a disposition as a result of which the value of settled property to which this section applies is less than it would be but for the disposition.	

	(4) Tax shall not be charged under this section--		

	(a)	
 	
on a beneficiary's becoming beneficially entitled to, or to an interest in possession in, settled property on or before attaining the specified age, or	

	(b)	
 	
on the death of a beneficiary before attaining the specified age.	

	(5) Subsections (3) to (7) and (9) of section 113 above shall apply for the purposes of this section as they apply for the purposes of that section (with the substitution of a reference to subsection (3)(b) above for the reference in section 113(4) to section 113(2)(b)).		
			
	(6) Where the conditions stated in paragraphs (a) and (b) of subsection (1) above were satisfied on 15th April 1976 with respect to property comprised in a settlement which commenced before that day, subsection (2)(a) above shall have effect with the substitution of a reference to that day for the reference to the commencement of the settlement, and the condition stated in subsection (2)(b) above shall be treated as satisfied if--		

	(a)	
 	
it is satisfied in respect of the period beginning with 15th April 1976, or	

	(b)	
 	
it is satisfied in respect of the period beginning with 1st April 1977 and either there was no beneficiary living on 15th April 1976 or the beneficiaries on 1st April 1977 included a living beneficiary, or	

	(c)	
 	
there is no power under the terms of the settlement whereby it could have become satisfied in respect of the period beginning with 1st April 1977, and the trusts of the settlement have not been varied at any time after 15th April 1976.	

	(7) In subsection (1) above "persons" includes unborn persons; but the conditions stated in that subsection shall be treated as not satisfied unless there is or has been a living beneficiary.		

	(8) For the purposes of this section a person's children shall be taken to include his illegitimate children, his adopted children and his stepchildren.		

Finance Act 1982

REPEALS

PART VII		

	CAPITAL TRANSFER TAX		

		
Chapter	

	
	
Short title	

	
	
Extent of repeal	

	

1975 c. 7.	

	
	
The Finance Act 1975.	

	
	
In Schedule 5--	

	
paragraphs 6 to 15;	

	
paragraph 16(5);	

	
in paragraph 17, in sub-paragraph (1) the words "or (c) charities", sub-paragraph (3)(c) to (e) and the word "and" immediately preceding paragraph (c), and sub-paragraphs (4) and (5) to (9);	

	
in paragraph 18 (as it applies where the failure or determination of the trusts concerned was before 12th April 1978), sub-paragraphs (2) and (3);	

	
in paragraph 19 (as it applies to property transferred into settlement before 10th March 1981), sub-paragraphs (2) and (3);	

	
paragraphs 20 and 21;	

	
in paragraph 24, sub-paragraph (4).