Finance Act 2006

Tax where interest in possession ends, or is treated as ending, during beneficiary’s life

12

In section 51 of IHTA 1984 (disposal of interest in possession not a transfer of value, but treated as coming to end of interest), after subsection (1) insert—

(1A) Where the interest disposed of is one to which the person became beneficially entitled on or after 22nd March 2006, subsection (1) above applies in relation to the disposal only if the interest is— (a) an immediate post-death interest, (b) a disabled person's interest within section 89B(1)(c) or (d) below, or (c) a transitional serial interest. (1B) Where the interest disposed of is one to which the person became beneficially entitled before 22nd March 2006, subsection (1) above does not apply in relation to the disposal if, immediately before the disposal, section 71A or 71D below applies to the property in which the interest subsists.

13

• (1) Section 52 of IHTA 1984 (tax on termination of interest in possession) is amended as follows.

• (2) After subsection (2) insert—

(2A) Where the interest mentioned in subsection (1) or (2) above is one to which the person became beneficially entitled on or after 22nd March 2006, that subsection applies in relation to the coming to an end of the interest only if the interest is— (a) an immediate post-death interest, (b) a disabled person's interest, or (c) a transitional serial interest.

• (3) After subsection (3) insert—

(3A) Where the interest mentioned in paragraph (a) of subsection (3) above is one to which the person mentioned in that paragraph became beneficially entitled on or after 22nd March 2006, that subsection applies in relation to the transaction only if the interest is— (a) an immediate post-death interest, (b) a disabled person's interest, or (c) a transitional serial interest.

14

• (1) Section 53 of IHTA 1984 (exceptions from tax charge under section 52) is amended as follows.

• (2) After subsection (1) insert—

(1A) Tax shall not be chargeable under section 52 above if— (a) the person whose interest comes to an end became beneficially entitled to the interest before 22nd March 2006, (b) the interest comes to an end on or after that day, and (c) immediately before the interest comes to an end, section 71A or 71D below applies to the property in which the interest subsists.

• (3) After subsection (2) insert—

(2A) Where— (a) a person becomes beneficially entitled on or after 22nd March 2006 to an interest in possession in settled property, and (b) the interest is not a disabled person's interest, subsection (2) above applies in relation to the coming to an end of the interest with the omission of the words “or to another interest in possession in the property”.

Non-aggregation with deceased person’s estate of property in which he had interest in possession if property reverts to settlor or passes to settlor’s spouse or civil partner etc

15

• (1) Section 54 of IHTA 1984 (exceptions from charge on death) is amended as follows.

• (2) After subsection (2) insert—

(2A) Where a person becomes beneficially entitled on or after 22nd March 2006 to an interest in possession in settled property, subsections (1) and (2) above apply in relation to the interest only if it is— (a) a disabled person's interest, or (b) a transitional serial interest. (2B) Where— (a) a person (“B”) becomes beneficially entitled on or after 22nd March 2006 to an interest in possession in settled property, (b) B dies, (c) the interest in possession, throughout the period beginning with when B becomes beneficially entitled to it and ending with B's death, is an immediate post-death interest, (d) the settlor died before B's death but less than two years earlier, and (e) on B's death, the settlor's widow or widower, or surviving civil partner, becomes beneficially entitled to the settled property and is domiciled in the United Kingdom, the value of the settled property shall be left out of account in determining for the purposes of this Act the value of B's estate immediately before his death.

• (3) In subsection (3) (section 53(5) and (6) apply in relation to subsections (1) and (2))—

• (a) for “(1) and (2)” substitute “ (1), (2) and (2B) ”, and

• (b) at the end add “ , but as if the reference in section 53(5)(a) above to section 53(4)(b) above were to subsection (2)(b) or (2B) above. ”

Rate of tax on ending of interest in possession in property settled during settlor’s life

16

• (1) Section 54A of IHTA 1984 (special rate of charge on coming to end of interest in possession in settled property affected by potentially exempt transfer) is amended as follows.

• (2) After subsection (1) insert—

(1A) Where a person becomes beneficially entitled on or after 22nd March 2006 to an interest in possession in settled property, subsection (1)(b) above applies in relation to the person's death only if the interest is— (a) a disabled person's interest, or (b) a transitional serial interest.

• (3) In subsection (2) (circumstances in which section applies to a chargeable transfer)—

• (a) in paragraph (c), omit “, other than property to which section 71 below applies”, and

• (b) in paragraph (d)(i), omit “or to which section 71 below applies”.

• (4) Where a chargeable transfer to which section 54A of IHTA 1984 applies was made before 22nd March 2006, that section has effect in relation to that transfer without the amendments made by sub-paragraph (3).

Property entering maintenance fund after death of person entitled to interest in possession

17

In section 57A of IHTA 1984 (relief where property enters fund for maintenance of historic buildings etc), after subsection (1) insert—

(1A) Where the interest mentioned in subsection (1)(a) above is one to which the person became beneficially entitled on or after 22nd March 2006, subsection (2) below does not apply unless, immediately before the person's death, the interest was— (a) an immediate post-death interest, (b) a disabled person's interest, or (c) a transitional serial interest.

“Relevant property” not to include property held on trust for a bereaved child

18

In section 58(1)(b) of IHTA 1984 (property to which certain sections apply is not relevant property for purposes of Chapter 3 of Part 3), after “71,” insert “ 71A, 71D, ”.

“Relevant property” to include property held on employee trusts or newspaper trusts if certain interests in possession subsist in the property

19

• (1) Section 58 of IHTA 1984 (meaning of “relevant property” in Chapter 3 of Part 3) is amended as follows.

• (2) In subsection (1)(b) (which provides that property to which section 86 applies is not relevant property), after “86 below applies” insert “ (but see subsection (1A) below) ”.

• (3) After subsection (1) insert—

(1A) Settled property to which section 86 below applies is “relevant property” for the purposes of this Chapter if— (a) an interest in possession subsists in that property, and (b) that interest falls within subsection (1B) or (1C) below. (1B) An interest in possession falls within this subsection if— (a) an individual is beneficially entitled to the interest in possession, (b) the individual became beneficially entitled to the interest in possession on or after 22nd March 2006, and (c) the interest in possession is— (i) not an immediate post-death interest, (ii) not a disabled person's interest, and (iii) not a transitional serial interest. (1C) An interest in possession falls within this subsection if— (a) a company is beneficially entitled to the interest in possession, (b) the business of the company consists wholly or mainly in the acquisition of interests in settled property, (c) the company has acquired the interest in possession for full consideration in money or money's worth from an individual who was beneficially entitled to it, (d) the individual became beneficially entitled to the interest in possession on or after 22nd March 2006, and (e) immediately before the company acquired the interest in possession, the interest in possession was neither an immediate post-death interest nor a transitional serial interest.

Certain interests in possession to which a person becomes entitled on or after 22nd March 2006 not to be “qualifying interests in possession” for purposes of Chapter 3 of Part 3 of IHTA 1984

20

• (1) Section 59 of IHTA 1984 (settlements without interests in possession: meaning of “qualifying interest in possession”) is amended as follows.

• (2) For subsection (1) substitute—

(1) In this Chapter “qualifying interest in possession” means— (a) an interest in possession— (i) to which an individual is beneficially entitled, and (ii) which, if the individual became beneficially entitled to the interest in possession on or after 22nd March 2006, is an immediate post-death interest, a disabled person's interest or a transitional serial interest, or (b) an interest in possession to which, where subsection (2) below applies, a company is beneficially entitled.

• (3) In subsection (2) (cases where interest in possession to which a company is entitled is a “qualifying” interest), after paragraph (b) insert

, and (c) if the individual became beneficially entitled to the interest in possession on or after 22nd March 2006, the interest is an immediate post-death interest, or a disabled person's interest within section 89B(1)(c) or (d) below or a transitional serial interest, immediately before the company acquires it.

• (4) Where a chargeable transfer to which section 54A of IHTA 1984 applies was made before 22nd March 2006, that section has effect in relation to that transfer as if in that section “qualifying interest in possession” has the meaning it would have apart from sub-paragraphs (1) to (3).

• (5) In the heading to Chapter 3 of Part 3 of IHTA 1984, at the end add “ , and certain settlements in which interests in possession subsist ”.

New meaning of “qualifying interest in possession” not to apply in section 72 of IHTA 1984

21

• (1) Section 72 of IHTA 1984 (property leaving employee trusts and newspaper trusts) is amended as follows.

• (2) In subsection (1) (section 72 applies to property to which section 86 applies if no qualifying interest in possession subsists in it), for “if no qualifying interest in possession subsists in it” substitute

if— (a) no interest in possession subsists in it to which an individual is beneficially entitled, and (b) no company-purchased interest in possession subsists in it.

• (3) After subsection (1) insert—

(1A) For the purposes of subsection (1)(b) above, an interest in possession is “company-purchased” if— (a) a company is beneficially entitled to the interest in possession, (b) the business of the company consists wholly or mainly in the acquisition of interests in settled property, and (c) the company has acquired the interest in possession for full consideration in money or money's worth from an individual who was beneficially entitled to it. (1B) Section 59(3) and (4) above apply for the purposes of subsection (1A)(c) above as for those of section 59(2)(b) above, but as if the references to the condition set out in section 59(2)(a) above were to the condition set out in subsection (1A)(b) above.

No charge under sections 71B, 71E etc where property held on trusts for bereaved child becomes held on trusts for charitable purposes etc

22

In section 76(1) of IHTA 1984 (which provides for tax not to be charged under certain provisions of Chapter 3 of Part 3 where property becomes held for charitable purposes etc), after “71,” insert “ 71A, 71D, ”.

No postponement of commencement date of settlement where property settled on or after 22nd March 2006 unless settlor, or spouse or civil partner, has immediate post-death interest

23

In section 80 of IHTA 1984 (postponement of commencement date of settlement where settlor, or spouse or civil partner or surviving spouse or surviving civil partner, has interest in possession at outset), after subsection (3) insert—

(4) Where the occasion first referred to in subsection (1) above occurs on or after 22nd March 2006, this section applies— (a) as though for “an interest in possession” in each place where that appears in subsection (1) above there were substituted “ a postponing interest ”, and (b) as though, for the purposes of that subsection, each of the following were a “postponing interest”— (i) an immediate post-death interest; (ii) a disabled person's interest.

Protective trusts

24

In section 88 of IHTA 1984 (protective trusts), after subsection (2) insert—

(3) Where— (a) settled property became held before 22nd March 2006 on trusts to the like effect as those specified in section 33(1)(i) of the Trustee Act 1925, and (b) as a result of the failure or determination of those trusts on or after 22nd March 2006, the principal beneficiary is treated by subsection (2)(b) above as beneficially entitled to an interest in possession, this Act shall apply in relation to that interest in possession as if the principal beneficiary became beneficially entitled to that interest in possession before 22nd March 2006. (4) Subsection (5) below applies where— (a) settled property becomes held on or after 22nd March 2006 on trusts to the like effect as those specified in section 33(1)(i) of the Trustee Act 1925, (b) the interest of the principal beneficiary under those trusts is— (i) an immediate post-death interest, (ii) a disabled person's interest within section 89B(1)(c) or (d) below, or (iii) a transitional serial interest, and (c) as a result of the failure or determination of those trusts, the principal beneficiary is treated by subsection (2)(b) above as beneficially entitled to an interest in possession. (5) This Act shall apply— (a) as if that interest in possession were a continuation of the immediate post-death interest, disabled person's interest or transitional serial interest, and (b) as if the immediate post-death interest, or disabled person's interest or transitional serial interest, had not come to an end on the failure or determination of the trusts. (6) Subsection (2) above does not apply in a case where— (a) settled property becomes held on or after 22nd March 2006 on trusts to the like effect as those specified in section 33(1)(i) of the Trustee Act 1925, and (b) the interest of the principal beneficiary under those trusts is— (i) not an immediate post-death interest, (ii) not a disabled person's interest within section 89B(1)(c) or (d) below, and (iii) not a transitional serial interest.

Alterations of capital etc of close company where participator holds shares etc in company as trustee of settled property in which an interest in possession subsists

25

In section 100 of IHTA 1984 (alteration of close company's capital etc where participator is trustee of settlement under which an individual is beneficially entitled to an interest in possession), after subsection (1) insert—

(1A) Where the interest in possession is one to which the individual became beneficially entitled on or after 22nd March 2006, this section applies only if the interest in possession is— (a) an immediate post-death interest, (b) a disabled person's interest, or (c) a transitional serial interest.

Close company’s interest in possession treated as interest of its participators

26

In section 101 of IHTA 1984 (where close company has interest in possession in settled property, its participators are treated for purposes of IHTA 1984 as the persons entitled to the interest), after subsection (1) insert—

(1A) Where the interest in possession mentioned in subsection (1) above is one to which the company became entitled on or after 22nd March 2006 (whether or not the company was a close company when it became entitled to the interest), subsection (1) above applies in relation to the interest only if it is— (a) an immediate post-death interest, or (b) a transitional serial interest. (1B) Subsection (1C) below applies where any of the participators mentioned in subsection (1) above (“the prior participator”) disposes of rights and interests of his in the company to another person (“the later participator”). (1C) If and so far as the later participator is a participator in the company by virtue of having any of the rights and interests disposed of, subsection (1) above is to be applied to him only as a participator in his own right (in particular, he is not to be treated by virtue of that subsection as having entitlement to the interest in possession as a result of disposal to him of entitlement that the prior participator was treated as having by virtue of that subsection, but this is without prejudice to the application of this Act in relation to the prior participator as the person making the disposal).

Distributions within two years of person’s death out of property settled by his will

27

• (1) Section 144 of IHTA 1984 (distribution etc from property settled by will) is amended as follows.

• (2) In subsection (1)—

• (a) for “This section applies” substitute “ Subsection (2) below applies ”, and

• (b) in paragraph (a), for “(apart from this section)” substitute “ (apart from subsection (2) below) ”.

• (3) After subsection (1) insert—

(1A) Where the testator dies on or after 22nd March 2006, subsection (1) above shall have effect as if the reference to any interest in possession were a reference to any interest in possession that is— (a) an immediate post-death interest, or (b) a disabled person's interest.

• (4) In subsection (2), for “this section” (in both places) substitute “ this subsection ”.

• (5) After subsection (2) insert—

(3) Subsection (4) below applies where— (a) a person dies on or after 22nd March 2006, (b) property comprised in the person's estate immediately before his death is settled by his will, and (c) within the period of two years after his death, but before an immediate post-death interest or a disabled person's interest has subsisted in the property, there occurs an event that involves causing the property to be held on trusts that would, if they had in fact been established by the testator's will, have resulted in— (i) an immediate post-death interest subsisting in the property, or (ii) section 71A or 71D above applying to the property. (4) Where this subsection applies by virtue of an event— (a) this Act shall have effect as if the will had provided that on the testator's death the property should be held as it is held after the event, but (b) tax shall not be charged on that event under any provision of Chapter 3 of Part 3 of this Act. (5) Subsection (4) above also applies where— (a) a person dies before 22nd March 2006, (b) property comprised in the person's estate immediately before his death is settled by his will, (c) an event occurs— (i) on or after 22nd March 2006, and (ii) within the period of two years after the testator's death, that involves causing the property to be held on trusts within subsection (6) below, (d) no immediate post-death interest, and no disabled person's interest, subsisted in the property at any time in the period beginning with the testator's death and ending immediately before the event, and (e) no other interest in possession subsisted in the property at any time in the period beginning with the testator's death and ending immediately before 22nd March 2006. (6) Trusts are within this subsection if they would, had they in fact been established by the testator's will and had the testator died at the time of the event mentioned in subsection (5)(c) above, have resulted in— (a) an immediate post-death interest subsisting in the property, or (b) section 71A or 71D above applying to the property.

Interpretation of IHTA 1984

28

In section 272 of IHTA 1984 (general interpretation), in the appropriate place insert—

“disabled person's interest” has the meaning given by section 89B above;

“immediate post-death interest” means an immediate post-death interest for the purposes of Chapter 2 of Part 3 (see section 49A above);

“transitional serial interest” means a transitional serial interest for the purposes of Chapter 2 of Part 3 (see section 49B above);

.

Part 4 — Related amendments in TCGA 1992

29

• (1) TCGA 1992 is amended in accordance with the following paragraphs of this Part of this Schedule.

• (2) The following paragraphs of this Part of this Schedule shall be deemed to have come into force on 22nd March 2006.

30

• (1) Section 72 (death of person entitled to an interest in possession) is amended as follows.

• (2) After subsection (1) insert—

(1A) Where the interest in possession mentioned in subsection (1) above is one to which the person becomes entitled on or after 22nd March 2006, the first sentence of that subsection applies in relation to that interest only if— (a) immediately before the person's death, the interest falls within subsection (1B) below, or (b) the person dies under the age of 18 years and, immediately before the person's death, section 71D of the Inheritance Tax Act 1984 (age 18-to-25 trusts) applies to the property in which the interest subsists. (1B) An interest falls within this subsection if— (a) the interest is— (i) an immediate post-death interest, within the meaning given by section 49A of the Inheritance Tax Act 1984, (ii) a transitional serial interest, within the meaning given by section 49B of that Act, or (iii) a disabled person's interest within section 89B(1)(c) or (d) of that Act, or (b) section 71A of that Act (trusts for bereaved minors) applies to the property in which the interest subsists. (1C) Subsection (1A) above does not have effect in relation to the operation of subsection (1) above as applied by subsection (2) below (but see subsection (2A) below).

• (3) After subsection (2) insert—

(2A) Where the interest in possession mentioned in subsection (2) above is one to which the person becomes entitled on or after 22nd March 2006— (a) subsection (2) above, and (b) the first sentence of subsection (1) above as applied by subsection (2) above, apply in relation to that interest only if, immediately before the person's death, the interest falls within subsection (1B)(a) above.

31

In section 73 (no chargeable gain on deemed disposal under section 71(1) where person becomes absolutely entitled on death of person entitled to interest in possession), after subsection (2) insert—

(2A) Where the interest in possession referred to in subsection (1) above is one to which the person becomes entitled on or after 22nd March 2006, subsections (1) and (2) above apply in relation to that interest only if— (a) immediately before the person's death, the interest falls within section 72(1B), or (b) the person dies under the age of 18 years and, immediately before the person's death, section 71D of the Inheritance Tax Act 1984 (age 18-to-25 trusts) applies to the property in which the interest subsists.

32

In section 260(2) (disposals where gain may be held over), after paragraph (d) insert—

(da) by virtue of subsection (2) of section 71B of that Act (trusts for bereaved minors) does not constitute an occasion on which inheritance tax is chargeable under that section, (db) by virtue of subsection (2) of section 71E of that Act (age 18-to-25 trusts) does not constitute an occasion on which inheritance tax is charged under that section,

.

Part 5 — Property subject to a reservation

33

• (1) FA 1986 is amended as follows.

• (2) After section 102 (gifts with reservation) insert—

(102ZA) (1) Subsection (2) below applies where— (a) an individual is beneficially entitled to an interest in possession in settled property, (b) either— (i) the individual became beneficially entitled to the interest in possession before 22nd March 2006, or (ii) the individual became beneficially entitled to the interest in possession on or after 22nd March 2006 and the interest is an immediate post-death interest, a disabled person's interest or a transitional serial interest, and (c) the interest in possession comes to an end during the individual's life. (2) For the purposes of— (a) section 102 above, and (b) Schedule 20 to this Act, the individual shall be taken (if, or so far as, he would not otherwise be) to dispose, on the coming to an end of the interest in possession, of the no-longer-possessed property by way of gift. (3) In subsection (2) above “the no-longer-possessed property” means the property in which the interest in possession subsisted immediately before it came to an end, other than any of it to which the individual becomes absolutely and beneficially entitled in possession on the coming to an end of the interest in possession.

• (3) In Schedule 20 (supplementary rules about gifts with reservation), after paragraph 4 insert—

(4A) (1) This paragraph applies where— (a) under section 102ZA of this Act, an individual (“D”) is taken to dispose of property by way of gift, and (b) the property continues to be settled property immediately after the disposal. (2) Paragraphs 2 to 4 above shall not apply but, subject to the following provisions of this paragraph, the principal section and the following provisions of this Schedule shall apply as if the property comprised in the gift consisted of the property comprised in the settlement on the material date, except in so far as that property neither is, nor represents, nor is derived from, property originally comprised in the gift. (3) Any property which— (a) on the material date is comprised in the settlement, and (b) is derived, directly or indirectly, from a loan made by D to the trustees of the settlement, shall be treated for the purposes of sub-paragraph (2) above as derived from property originally comprised in the gift. (4) If the settlement comes to an end at some time before the material date as respects all or any of the property which, if D had died immediately before that time, would be treated as comprised in the gift,— (a) the property in question, other than property to which D then becomes absolutely and beneficially entitled in possession, and (b) any consideration (not consisting of rights under the settlement) given by D for any of the property to which D so becomes entitled, shall be treated as comprised in the gift (in addition to any other property so comprised). (5) Where, under any trust or power relating to settled property, income arising from that property after the material date is accumulated, the accumulations shall not be treated for the purposes of sub-paragraph (2) above as derived from that property.

• (4) Sub-paragraphs (1) to (3) shall be deemed to have come into force on 22nd March 2006, but only as respects cases where an interest in possession comes to an end on or after that day.

Part 6 — Conditional exemption: relief from charges

34

• (1) Section 79 of IHTA 1984 (subsection (3) of which provides for charges to tax where, in the case of settled property designated under section 31 on a claim under section 79, an event occurs that would be chargeable under section 32 or 32A if the claim had been under section 30) is amended as follows.

• (2) After subsection (5) (amount on which tax charged under subsection (3)) insert—

(5A) Where the event giving rise to a charge to tax under subsection (3) above is a disposal on sale, and the sale— (a) was not intended to confer any gratuitous benefit on any person, and (b) was either a transaction at arm's length between persons not connected with each other or a transaction such as might be expected to be made at arm's length between persons not connected with each other, the value of the property at the time of that event shall be taken for the purposes of subsection (5) above to be equal to the proceeds of the sale.

• (3) For subsection (7) (which provides that the “relevant period” mentioned in subsection (6) begins with the latest of certain listed days and ends with the day before the event giving rise to the charge under subsection (3)) substitute—

(7) In subsection (6) above “the relevant period” means the period given by subsection (7A) below or, if shorter, the period given by subsection (7B) below. (7A) The period given by this subsection is the period beginning with the latest of— (a) the day on which the settlement commenced, (b) the date of the last ten-year anniversary of the settlement to fall before the day on which the property became comprised in the settlement, (c) the date of the last ten-year anniversary of the settlement to fall before the day on which the property was designated under section 31 above on a claim under this section, and (d) 13th March 1975, and ending with the day before the event giving rise to the charge. (7B) The period given by this subsection is the period equal in length to the number of relevant-property days in the period— (a) beginning with the day that is the latest of those referred to in paragraphs (a) to (d) of subsection (7A) above, and (b) ending with the day before the event giving rise to the charge. (7C) For the purposes of subsection (7B) above, a day is a “relevant-property day” if at any time on that day the property was relevant property.

• (4) After subsection (9) insert—

(9A) Subsection (9B) below applies where the same event gives rise— (a) to a charge under subsection (3) above in relation to any property, and (b) to a charge under section 32 or 32A above in relation to that property. (9B) If the amount of each of the charges is the same, each charge shall have effect as a charge for one half of the amount that would be charged apart from this subsection; otherwise, whichever of the charges is lower in amount shall have effect as if it were a charge the amount of which is nil.

SCHEDULE 21

1

In section 271 of TCGA 1992 (exemptions), after subsection (1A) insert—

(1B) But subsection (1A) does not prevent such a gain from being treated as a chargeable gain for the purposes of sections 185F to 185I of the Finance Act 2004 (scheme chargeable payments: gains from taxable property).

2

Part 4 of FA 2004 (pension schemes) is amended as follows.

3

• (1) Section 160 (payments by registered pension schemes) is amended as follows.

• (2) After subsection (7) insert—

(7A) Sections 185A to 185I contain provision about the receipt of income and gains from taxable property.

• (3) In subsection (8), after “borrowing” insert “ and the receipt of income and gains from taxable property. ”

4

In section 173 (benefits), after subsection (7) insert—

(7A) This section does not apply if— (a) the pension scheme is an investment-regulated pension scheme, and (b) the asset consists of taxable property.

5

After section 174 insert—

(174A) (1) An investment-regulated pension scheme is to be treated as making an unauthorised payment to a member of the pension scheme if— (a) the pension scheme acquires an interest in taxable property, and (b) the interest is held by the pension scheme for the purposes of an arrangement under the pension scheme relating to the member. (2) An investment-regulated pension scheme is to be treated as making an unauthorised payment to a member of the pension scheme if— (a) an interest in taxable property is held by the pension scheme for the purposes of an arrangement under the pension scheme relating to the member, and (b) the property is improved. (3) An investment-regulated pension scheme is to be treated as making an unauthorised payment to a member of the pension scheme if— (a) an interest in property which is not residential property is held by the pension scheme for the purposes of an arrangement under the pension scheme relating to the member, and (b) the property is converted or adapted to become residential property. (4) Schedule 29A makes provision supplementing this section; and in that Schedule— (a) Part 1 defines “investment-regulated pension scheme”, (b) Part 2 defines “taxable property” (and “residential property”), (c) Part 3 explains what it means to acquire, and to hold, an interest in taxable property, and (d) Part 4 contains provision for calculating the amounts of unauthorised payments treated as made by this section and explains when the unauthorised payments are treated as made.

6

After section 185 insert—

(185A) (1) An investment-regulated pension scheme is to be treated as having made a scheme chargeable payment if the pension scheme holds an interest in taxable property in a tax year. (2) The amount of the scheme chargeable payment depends on whether a person who holds the interest in the property directly receives profits arising from the interest in the tax year. (3) If a person who holds the interest in the property directly receives such profits in the tax year, the amount of the scheme chargeable payment is the greater of— (a) an amount equal to the amount of the annual profits from the interest in the property (see section 185B(1)), and (b) the amount of the deemed profits from the interest in the property for the year (see sections 185B(2) and 185C). (4) If no person who holds the interest in the property directly receives such profits in the tax year, the amount of the scheme chargeable payment is the amount of the deemed profits from the interest in the property for the year (see sections 185B(2) and 185C). (5) But where section 185D applies, the amount of the scheme chargeable payment is the amount found under subsection (3) or (4) as apportioned to the pension scheme in accordance with that section. (6) Section 185E makes provision for credits against income tax charged under section 239 (scheme sanction charge) in respect of a scheme chargeable payment treated as made by virtue of this section. (185B) (1) For the purposes of section 185A(3) the amount of the annual profits from the interest in the property is the total amount of profits received from the interest in the tax year— (a) by each person who holds the interest directly, and (b) at a time when the property is scheme-held taxable property. (2) For the purposes of section 185A(3) and (4) the amount of the deemed profits from the interest in the property for the tax year is— $$DMV10×DTPDY$where—DMV is the deemed market value of the interest in the property for the year (see section 185C),DTP is the number of days in the year for which the property is scheme-held taxable property, andDY is the number of days in the year.$ (3) In this Part “scheme-held taxable property” means property— (a) which is taxable property, and (b) an interest in which is held by the pension scheme. (185C) (1) For the purposes of section 185B(2), where no person who holds the interest in the property directly during the tax year does so by virtue of a lease of residential property, the deemed market value of the interest for the year is— $$(MV+UP)×(1+RPI)$where—MV is the opening market value (see subsection (2)),UP is the total of any unauthorised payments treated as made by the pension scheme under section 174A in relation to the property in the tax year, other than any such payment treated as made by virtue of the property becoming scheme-held taxable property in the year, andRPI is the figure expressed as a decimal which represents the percentage increase in the retail prices index between the first day in the tax year on which the property is scheme-held taxable property and the last such day (or, if there is no such increase, is nil).$ (2) In subsection (1) “the opening market value” means— (a) if the property is not scheme-held taxable property immediately before the beginning of the tax year, the market value of the interest in the property immediately after the time during the year when the property first becomes scheme-held taxable property, and (b) otherwise, the deemed market value of the interest for the previous tax year. (3) For the purposes of section 185B(2), where a person who holds the interest in the property directly during the tax year does so by virtue of a lease of residential property, the deemed market value of the interest for the year is the relevant rental value of the property calculated in accordance with paragraph 34 of Schedule 29A on the following assumptions— (a) that the lease was granted when the property first became scheme-held taxable property; (b) that the term of the lease is 50 years; (c) that a fully commercial rent is payable for the first five years of that term; (d) that afterwards the rent is reviewed on an upwards-only basis. (185D) (1) This section applies where the pension scheme holds the interest in the property indirectly for the whole of the period in the tax year for which the property is scheme-held taxable property. (2) The amount that would otherwise be the amount of the scheme chargeable payment is to be apportioned to the pension scheme by applying paragraphs 41 to 43 of Schedule 29A to it as if it were the total taxable amount in relation to an unauthorised payment treated as made— (a) by the pension scheme, (b) in connection with the acquisition of the interest in the property, and (c) at the end of the last day in the tax year on which the property is scheme-held taxable property. (3) But where— (a) the amount found in relation to the pension scheme on the day mentioned in paragraph (c) of subsection (2), differs from (b) the amount that would be found in relation to the pension scheme under that subsection on another day in the tax year on which the property is scheme-held taxable property, the amount to be apportioned to the pension scheme under this section is the average of the amounts produced by applying subsection (2) in relation to the pension scheme on each day in the tax year on which the property is scheme-held taxable property. (185E) (1) This section applies where— (a) the pension scheme holds the interest in the property indirectly in the tax year, (b) a person who holds the interest directly receives profits arising from the interest at a time in the tax year when the property is scheme-held taxable property, (c) tax is payable on those profits by that person (assuming them to be the highest part of the person's income for the tax year in which they are received), and (d) that tax has been paid. (2) The amount determined under subsection (3) is to be allowed as a credit against any income tax charged under section 239 in respect of the scheme chargeable payment treated as made by virtue of the pension scheme holding the interest in the property in the tax year. (3) That amount is a proportion of the tax payable and paid determined by reference to the proportion of the amount that would otherwise be the amount of the scheme chargeable payment that is apportioned to the pension scheme under section 185D. (4) Where— (a) by virtue of this section an amount is allowed as a credit against income tax charged under section 239, and (b) the amount of tax payable and paid by reference to which the amount of the credit was calculated is subsequently varied, the amount of the credit is to be varied accordingly, and any necessary adjustments are to be made to give effect to the variation (whether by making assessments or otherwise). (185F) (1) An investment-regulated pension scheme is to be treated as having made a scheme chargeable payment where— (a) in a tax year the pension scheme holds an interest in property which is taxable property or which has been taxable property at any time whilst the interest has been held by the pension scheme (a “taxable interest”), (b) a gain is treated as accruing to the pension scheme in respect of the taxable interest in the tax year, and (c) the total amount of gains treated as accruing to the pension scheme in respect of taxable interests in the tax year exceeds the total amount of losses treated as accruing to the pension scheme in respect of taxable interests in the tax year. (2) The amount of the scheme chargeable payment is an amount equal to the difference between— (a) the total amount of gains treated as accruing to the pension scheme in respect of taxable interests in the tax year, and (b) the total amount of losses treated as accruing to the pension scheme in respect of taxable interests in the tax year, (but this is subject to section 185G(10)). (3) A gain or loss is treated as accruing to a pension scheme in respect of a taxable interest in a tax year if— (a) by virtue of section 185G a chargeable gain or allowable loss is treated for the purposes of this section as accruing in the tax year to the person who holds the taxable interest directly, or (b) in the tax year the pension scheme or another vehicle ceases to hold all or part of an interest in a vehicle through which the pension scheme holds the taxable interest indirectly (see section 185H). (185G) (1) For the purposes of this section the person (“the transferor”) who holds the taxable interest directly is to be treated as holding an asset (a “taxable asset”) consisting of the interest. (2) For the purpose of determining— (a) whether the transferor disposes of the taxable asset, (b) when such a disposal takes place, and (c) whether a chargeable gain or allowable loss is treated for the purposes of section 185F as accruing to the transferor on a disposal of the taxable asset in a tax year and, if so, the amount of the chargeable gain or allowable loss, TCGA 1992 is to be treated as applying to the transferor and the taxable asset, but subject as follows. (3) TCGA 1992 is to be treated as applying as if— (a) throughout the tax year the transferor were resident, ordinarily resident and domiciled in the United Kingdom, (b) no allowable losses accrued to the transferor in any previous tax year, (c) for the purposes of section 2A (taper relief) of that Act the transferor were not chargeable to corporation tax in respect of any chargeable gain accruing to the transferor from a disposal of the taxable asset and the taxable asset were at all relevant times a non-business asset, (d) notice under section 16(2A) (losses) of that Act were given by the transferor in relation to the year in respect of any loss treated as accruing to the transferor in the year from a disposal of the taxable asset, (e) section 45(1) (wasting assets) of that Act did not apply to a disposal of the taxable asset, (f) for the purposes of section 53 (indexation allowance) of that Act the transferor were not chargeable to corporation tax in respect of any chargeable gain accruing to the transferor from a disposal of the taxable asset, (g) section 171(1) (transfers within a group) of that Act did not apply to a disposal of the taxable asset (so that no election could be made in relation to such a disposal under section 171A (notional transfers within a group) of that Act), and (h) sections 222 to 224 (relief on disposal of private residence) of that Act did not apply to a gain on a disposal of the taxable asset by virtue of section 225 (private residence occupied under terms of settlement) of that Act. (4) Where the taxable asset became taxable property whilst held directly by the pension scheme, TCGA 1992 is to be treated as applying to a disposal of the asset as if— (a) the asset had been acquired by the transferor at the time it became taxable property, and (b) the amount deductible under section 38(1)(a) (consideration for acquisition of asset) of that Act in respect of the disposal were the amount of the unauthorised payment treated as made by the pension scheme at that time. (5) Subsections (6) to (8) apply where the pension scheme holds the taxable asset indirectly. (6) TCGA 1992 is to be treated as applying to a disposal of the asset as if the amount deductible under section 38(1) of that Act in respect of the disposal were— (a) the total amount of unauthorised payments treated as made by the pension scheme in respect of the taxable asset up to the time of the disposal, less (b) the amount found under paragraph (a) to the extent that it has already been taken into account in calculating the gains or losses accruing to the pension scheme in respect of the taxable asset by virtue of this section or section 185H. (7) The amount that would otherwise be the amount of the consideration for which the disposal is made (or treated as made) is to be scaled down by applying paragraphs 41 to 43 of Schedule 29A to it as if it were the total taxable amount in relation to an unauthorised payment treated as made— (a) by the pension scheme, (b) in connection with the acquisition of the interest in the property which constitutes the taxable asset, and (c) at the time of the disposal. (8) Subsection (6) is subject to section 42 of TCGA 1992 (part disposals); but in the application of that section in relation to the taxable asset the amount of the consideration for the disposal is to be taken to be that amount apart from subsection (7). (9) Where the taxable asset was not taxable property for the whole period beginning with— (a) the time when the pension scheme acquired the asset, or (b) if later, the time when the asset first became taxable property, and ending with the disposal, the amount that would otherwise be the amount of any chargeable gain or allowable loss treated as accruing on a disposal of the asset is to be reduced by reference to the proportion of the period for which the asset was not taxable property. (10) Where— (a) the taxable asset is a wasting asset consisting of tangible moveable property, and (b) by virtue of section 185F, a loss is treated as accruing to the pension scheme from a disposal of the asset in a tax year, the loss is only to be allowed as a deduction from any gains treated as accruing to the pension scheme by virtue of that section from other disposals in the year of taxable assets which are wasting assets consisting of tangible moveable property. (185H) (1) This section applies for the purposes of section 185F where the pension scheme or another vehicle ceases to hold all or part of an interest in a vehicle through which the pension scheme holds the taxable interest indirectly. (2) The pension scheme is to be treated as disposing of the interest in the vehicle through which the pension scheme holds the taxable interest indirectly. (3) The amount of the gain or loss treated as accruing to the pension scheme on the disposal of the interest in the vehicle is the difference between— (a) the deemed consideration received for the disposal of the interest, and (b) the deemed consideration given for the interest. (4) The deemed consideration received for the disposal of the interest in the vehicle is the difference between— (a) the market value of the taxable interest at the time of the disposal, apportioned to the pension scheme in accordance with subsection (5) immediately before that time, and (b) the market value of the taxable interest at the time of the disposal, apportioned to the pension scheme in accordance with subsection (5) immediately after that time. (5) An amount mentioned in subsection (4) is to be apportioned to the pension scheme by applying paragraphs 41 to 43 of Schedule 29A to it as if it were the total taxable amount in relation to an unauthorised payment treated as made— (a) by the pension scheme, (b) in connection with the acquisition of the taxable interest, and (c) at the time at which the amount is to be apportioned to the pension scheme in accordance with that subsection. (6) The deemed consideration given for the interest in the vehicle is— (a) the total amount of unauthorised payments treated as made by the pension scheme in respect of the taxable interest up to the time of the disposal, less (b) the amount found under paragraph (a) to the extent that it has already been taken into account in calculating the gains or losses accruing to the pension scheme in respect of the taxable interest by virtue of section 185G or this section. (185I) (1) This section applies where by virtue of section 185F a pension scheme is to be treated as making a scheme chargeable payment which is to any extent attributable— (a) to a chargeable gain treated by virtue of section 185G as accruing to another person on a disposal of a taxable asset, or (b) to a gain treated by virtue of section 185H as accruing to the pension scheme as a result of another person disposing of an interest in a vehicle through which the pension scheme holds a taxable interest indirectly. (2) Where— (a) tax is payable in respect of the disposal by the person who makes the disposal, and (b) that tax has been paid, the amount determined under subsection (3) or (4) (as appropriate) is to be allowed as a credit against any income tax charged under section 239 in respect of the scheme chargeable payment. (3) In a case within paragraph (a) of subsection (1), that amount is a proportion of the amount of tax paid and payable determined by reference to the proportion of the amount of consideration for the disposal that is apportioned under section 185G(7). (4) In a case within paragraph (b) of subsection (1), that amount is the amount of tax paid and payable apportioned to the pension scheme by applying paragraphs 41 to 43 of Schedule 29A to it as if it were the total taxable amount in relation to an unauthorised payment treated as made— (a) by the pension scheme, (b) in connection with an acquisition of the taxable interest by the person disposing of the interest in the vehicle, and (c) at the time of the disposal. (5) Where— (a) by virtue of this section an amount is allowed as a credit against income tax charged under section 239, and (b) the amount of tax payable and paid by reference to which the amount of the credit was calculated is subsequently varied, the amount of the credit is to be varied accordingly, and any necessary adjustments are to be made to give effect to the variation (whether by making assessments or otherwise).

7

In section 186 (relief for income derived from scheme investments), after subsection (2) insert—

(2A) The exemption provided by subsection (1) does not prevent the income from being charged to tax by virtue of section 185A.

8

In section 239 (scheme sanction charge), after subsection (5) insert—

(6) This section is subject to provision made by regulations under section 273ZA (income and gains from taxable property).

9

In section 241(1) (scheme chargeable payments) insert at the end

, and (c) a scheme chargeable payment which the pension scheme is to be treated as having made by section 185A (income from taxable property) or 185F (gains from taxable property).

10

After section 273 insert—

(273ZA) (1) The Treasury may make regulations in relation to cases where— (a) an investment-regulated pension scheme holds an interest in taxable property, (b) the pension scheme is non-UK resident, and (c) the property is not located in the United Kingdom. (2) The regulations may make provision for a member of the pension scheme for the purposes of whose arrangement the interest is held to be liable to the scheme sanction charge so far as relating to a scheme chargeable payment treated as made by the pension scheme— (a) under section 185A (income from taxable property) by virtue of the pension scheme holding the interest in the property, or (b) under section 185F (gains from taxable property) by virtue of a gain treated as accruing to the pension scheme in respect of the interest in the property. (3) The regulations may make provision— (a) for the member to be liable to all of the scheme sanction charge arising by virtue of the scheme chargeable payment or to the charge to such extent as the regulations may provide, (b) for the charge to be apportioned between members of the pension scheme where the interest in the property is held for the purposes of more than one arrangement under the pension scheme, and (c) for the scheme administrator not to be liable to the scheme sanction charge or not to be liable to the charge to such extent as the regulations may provide. (4) The regulations may make provision for cases where— (a) a member of a pension scheme would otherwise be liable to the scheme sanction charge arising by virtue of a scheme chargeable payment treated as made by the pension scheme under section 185F in a tax year, (b) the member does not meet such conditions as to residence in the tax year as the regulations may prescribe, (c) the member meets those conditions in a subsequent tax year, and (d) such other conditions as the regulations may prescribe are met. (5) The regulations may make provision for the member— (a) not to be liable to the scheme sanction charge in the tax year in which the scheme chargeable payment is treated as made, but (b) to be liable in a subsequent tax year to such extent as the regulations may provide to the scheme sanction charge arising by virtue of the payment. (6) The regulations may— (a) amend this Part (apart from this section), (b) include provision having effect in relation to times before they are made, (c) contain transitional provisions and savings, and (d) make different provision for different cases. (7) For the purposes of this section a pension scheme is non-UK resident if it is established in a country or territory outside the United Kingdom.

11

In section 278 (market value), after subsection (3) insert—

(3A) For the purposes of this Part the market value of taxable property, or of an interest in taxable property, is to be determined in accordance with section 272 of TCGA 1992. (3B) Subsection (3A) is subject to any provision made by regulations under paragraph 36(2) of Schedule 29A.

12

In section 280(2) (index of defined expressions), in the table, insert the following entries at the appropriate places—

acquiring an interest in property (for the purposes of the taxable property provisions)	paragraphs 12 and 27 to 29 of Schedule 29A

;

building (for the purposes of the taxable property provisions)	paragraph 7(2) of Schedule 29A

;

holding an interest in a person (for the purposes of the taxable property provisions)	paragraph 16(2) to (4) of Schedule 29A

;

holding an interest in property (for the purposes of the taxable property provisions)	paragraph 13 of Schedule 29A

;

holding directly an interest in a vehicle (for the purposes of the taxable property provisions)	paragraph 20(3) of Schedule 29A

;

holding directly an interest in property (for the purposes of the taxable property provisions)	paragraphs 14 and 15 of Schedule 29A

;

holding indirectly an interest in a vehicle (for the purposes of the taxable property provisions)	paragraph 20(4) of Schedule 29A

;

holding indirectly an interest in property (for the purposes of the taxable property provisions)	paragraph 16(1) of Schedule 29A

;

investment-regulated pension scheme (for the purposes of the taxable property provisions)	paragraphs 1 to 3 of Schedule 29A

;

residential property (for the purposes of the taxable property provisions)	paragraphs 7(1), 8 and 9 of Schedule 29A

;

scheme-held taxable property	section 185B(3)

;

sums and assets held for the purposes of an arrangement (for the purposes of the taxable property provisions)	paragraph 5 of Schedule 29A

;

taxable property (for the purposes of the taxable property provisions)	paragraphs 6, 10 and 11 of Schedule 29A

;

the taxable property provisions	paragraph 1(3) of Schedule 29A

;

vehicle (in the taxable property provisions)	paragraph 20(2) of Schedule 29A

.

13

After Schedule 29 insert—