Chapter 10: Heritage maintenance settlements
Overview
1497.A heritage maintenance settlement (an HMS) is a settlement that holds property (“heritage maintenance property”) solely for the maintenance of, or for making provision of public access to, “qualifying property” designated under section 31 of IHTA. And the heritage maintenance property itself must be the subject of a direction under paragraph 1 of Schedule 4 to that Act.
1498.The provisions of this Chapter grant income tax benefits to complement inheritance tax benefits granted under IHTA provisions. So many of the definitions in section 507 cross-refer to IHTA provisions.
1499.“Qualifying property” is defined in paragraph 3(2) of Schedule 4 to IHTA, and includes:
land of outstanding scenic, historic or scientific interest;
buildings of such outstanding historical or architectural interest that special steps should be taken to preserve them, and land essential to protect the character and amenities of such buildings; and
objects historically associated with such buildings.
1500.An HMS does not usually own the qualifying property itself. Its role is to hold the heritage maintenance property that has been settled for the purpose of maintaining the qualifying property and providing access to it. The IHTA rules specify that the heritage maintenance property must be subject to the terms of the trust for at least six years from the time it goes into the trust.
1501.An HMS may also have subsidiary purposes, such as the maintenance of property held under the trust for maintenance of the qualifying property. During the six-year period the trust must provide that any other application or devolution of income or capital outside these main and subsidiary purposes must be for the benefit of a charity with heritage purposes or a body listed in Schedule 3 to IHTA.
1502.In the absence of the rules in this Chapter, the ordinary income tax rules would apply for charging the settlors of certain settlements under Chapter 5 of Part 5 of ITTOIA. In such cases all income, and certain capital sums paid to the settlor, are charged on the settlor as income. (The nature of an HMS means that any settlor of any HMS will fall within both the definition of settlor in section 467 of this Act and the definition in section 620 of ITTOIA.)
1503.By contrast, sections 508 and 509 make it possible for the trustees of an HMS to elect, for a tax year, that:
the income not be treated as that of the settlor; and
any sum applied out of the heritage maintenance property not be treated as the income of an owner or occupier of the qualifying property.
1504.But the trustees may not consider it appropriate to make such an election. In such cases section 510 ensures that, if in a tax year any sum applied for a property maintenance purpose is greater than the trustees’ income for that year, the settlor is not charged to tax on the excess.
1505.And, in the absence of an election, section 511 protects the settlor from double taxation if the trustees’ income is applied for a property maintenance purpose through a trade carried on by the settlor and would therefore ordinarily be a receipt of that trade. The settlor is only charged under Chapter 5 of Part 5 of ITTOIA, not also on the trading receipt.
1506.The Chapter also charges the trustees to tax in cases where the conditions for property to be qualifying property, or the rules concerning the purposes of the HMS, are breached (sections 512 to 517).
Section 507: Overview of Chapter
1507.This section draws together a number of important definitions. It is based on sections 690, 691(1), 692(1), 693 and 694(1) of ICTA.
1508.“Heritage maintenance property” is defined as property to which a direction (a “heritage direction”) under paragraph 1 of Schedule 4 to IHTA has effect. The property here is not the qualifying property mentioned in paragraph 3(2) of Schedule 3 to IHTA, but the property in the trust set up for the maintenance of that qualifying property.
1509.A “heritage maintenance settlement” is defined as a settlement that comprises heritage maintenance property.
1510.If there is in the settlement some property that is heritage maintenance property and some that is not, the two blocks of property are treated for the purposes of this Chapter, and for three other purposes, as being comprised in separate settlements – the “separate settlements rule”.
1511.The first of those purposes relates to certain trade losses under Chapter 2 of Part 4. The source legislation refers only to sections 380 to 387 of ICTA, thus excluding sections 388 and 389 of that Act (terminal loss relief) from the operation of the rule.
1512.The second purpose of the separate settlements rule relates to sections 686 to 689B of ICTA, now rewritten in Chapters 2 to 8 of this Part.
1513.The third purpose of the separate settlements rule concerns amounts assessed on the settlor of a settlement under Chapter 5 of Part 5 of ITTOIA. The right to make an election under section 508 can therefore only apply to that part of the settlement that comprises heritage maintenance property. And the special rules about capital sums paid to the settlor (see section 633 of ITTOIA) will also apply only to that part.
Section 508: Election by trustees
1514.This section provides that the trustees of an HMS may make an election for this section to have effect for a tax year. It is based on section 691(1), (2) and (4) of ICTA.
1515.The first effect of an election is that income of the HMS is not to be treated as income of the settlor, as it otherwise would be under Chapter 5 of Part 5 of ITTOIA. So such income will be taxed on the trustees and at trust rates.
1516.The second effect is that certain sums applied from the trust are not to be treated as income of the recipients.
1517.Subsection (4)(a) is concerned with any person who has an interest in, or occupies, the qualifying property in respect of which the sum is applied. One example is a sum applied in repairing qualifying property when the occupier is an employee not wholly exempted from the benefit of such expenditure by section 315 of ITEPA. Another example is a sum applied in reimbursing an expense of an owner or occupier (other than the settlor, see section 511) who is carrying on a trade in respect of the qualifying property.
1518.Subsection (4)(b) is concerned with section 633 of ITTOIA. Under that provision a capital sum paid to the settlor is taxable on the settlor as income. But if the sum is applied for a property maintenance purpose, the effect of the election is that the sum does not form part of the settlor’s income.
1519.The election is to be made to an officer of Revenue and Customs, rather than to the Commissioners for Her Majesty’s Revenue and Customs. See Change 5 in Annex 1.
1520.Accordingly, parts of section 691(4) of ICTA are no longer not necessary and are omitted. The election is one to which Schedule 1A to TMA applies, as it is not made on the trustees’ self-assessment tax return. So paragraph 2(1) of that Schedule is sufficient to ensure that the election is to be made to an officer of Revenue and Customs. And paragraph 2(3) of that Schedule is sufficient to ensure that it “shall be in such form as the Commissioners may require”.
Section 509: Change of circumstances during a tax year
1521.This section provides for the splitting of a tax year if there is a change of circumstances, eg if a heritage direction takes effect, or ceases to have effect, during the year. It is based on section 691(5) of ICTA.
1522.Without this provision, if a heritage direction were not in force for the full tax year, no election could be made for that year. The effect of the section is to treat each of the parts of the tax year (before and after the change of circumstances) as a separate tax year, in respect of which an election may be made.
1523.For this section to apply it must be the case, in one of the two parts of the tax year, that a heritage direction applies and the HMS income is taxable on the settlor under Chapter 5 of Part 5 of ITTOIA. In the other part of the tax year, either or both of these statements will not be true.
Section 510: Sums applied for property maintenance purposes
1524.This section addresses a particular issue where an election under section 508 has not been made, and so the income for the year is taxable on the settlor. It is based on section 691(3) of ICTA.
1525.The issue is the treatment of any sum applied for a property maintenance purpose that exceeds the income for the year. Such a sum may already have been taxed on the trustees or the settlor in past years, but it may also be subject to a charge to income tax for one or other of the reasons referred to in subsection (2).
1526.This section cancels such a charge to tax on the excess. The result is that all the income of the HMS for the year is taxable on the settlor solely under Chapter 5 of Part 5 of ITTOIA. There is no other charge on any sum in excess of that income to the extent that the excess is applied for a property maintenance purpose.
Section 511: Prevention of double taxation: reimbursement of settlor
1527.This section prevents a double charge to income tax that may arise if the settlor is carrying on a trade. It is based on section 692 of ICTA.
1528.The source legislation (section 692(1) of ICTA) refers to expenditure that “is (or would apart from the reimbursement be) deductible in computing … profits”. The bracketed words have been omitted from subsection (1)(c) because the amount reimbursed is, strictly, income of the business that is ignored in computing profits. It does not cancel the real expenditure, which in principle remains allowable.
Section 512: Charge to tax on some settlements
1529.This section makes provision for a charge to income tax on income arising to the trustees in a number of circumstances. It is based on section 694(1) and (5) of ICTA.
1530.Most of the circumstances involved (cases A to C) involve a breach of the main IHTA conditions.
1531.But no charge will arise under this section if the settlor has already been charged on the income as trust income: see section 517. This charge can, therefore, only arise if an election under section 508 has been made.
1532.Case D is an anti-avoidance provision to guard against loss of tax if a non-heritage beneficiary with a reversionary interest in property comprised in the HMS sells that interest to another heritage body (H1).
1533.The charge under this Chapter would not ordinarily arise when the property leaves the HMS on reversion, because the recipient is a heritage body or a charity. But the non-heritage person would have effectively obtained money from the heritage property.
1534.So it is provided that if, earlier or at the time, H1 (or any other heritage body) has paid monetary consideration for any interest under the settlement, a charge on the trustees will arise. But if H1 has acquired the interest from another heritage body, there is no charge.
Section 513: Income charged
1535.This section sets out the measure of the income to be charged to tax under section 512. It is based on section 694(2) and (4) of ICTA.
1536.Other than income applied for a property maintenance purpose or for the benefit of a heritage body, the charge is on all the income that has arisen from the time the HMS came into being to the occasion of charge. But if there has been a previous charge to tax under section 512, the period over which income is measured starts from the date of that previous occasion of charge. There is no credit for any other tax charge on any part of the income that has arisen over the relevant period.
Section 514: Persons liable
1537.This section provides that the persons liable for the tax under section 512 are the trustees of the HMS. It is based on section 694(4) of ICTA.
Section 515: Rate of tax
1538.This section sets out the rate at which the income charged under section 512 is to be taxed. It is based on section 694(2A) of ICTA.
1539.That rate of tax is arrived at by subtracting the trust rate from the higher rate of income tax. This applies to income of all types, including dividend income.
1540.In the particular case of dividend income, the provision does not seek to reinstate the effect of charging the settlor instead of the trustee. (Dividend income would generally be charged on an individual at the dividend upper rate, and on the trustees of the HMS at the dividend trust rate. But the difference between these rates is not necessarily the same as that between the rates referred to by this section.)
1541.From the tax year 2004-05 onwards, the trust rate has been aligned with the higher rate. So, at present, there can be no charge under section 512. But the situation could change in the future.
Section 516: Transfer of property between settlements
1542.This section addresses occasions when heritage maintenance property leaves the HMS and becomes comprised in another settlement either:
without a charge to inheritance tax arising on the transfer; or
when the property does not cease to be heritage property on the transfer.
It is based on section 694(6) and (7) of ICTA.
1543.The “default rule” is that inheritance tax is charged when property leaves an HMS (paragraph 8 of Schedule 4 to IHTA).
1544.But no such charge arises if, within 30 days of the property leaving the HMS, it becomes comprised in another HMS. This is because the exemption for transfers into an HMS overrules the charge when the property leaves an HMS (paragraph 9(1) and (2) of Schedule 4 to IHTA). The only exception to this is when the value of the property leaving the first HMS is greater than its value on entering the second. In that case, inheritance tax is charged on the excess (paragraph 9(4) of Schedule 4 to IHTA). But that charge is ignored in considering the effect of this section (see the words in brackets in subsection (4)(a)).
1545.In some circumstances, a charge to income tax under section 512 could still arise, there being, for example, no 30-day permitted period in Case B set out in section 512 to match the “permitted period” in the inheritance tax provision.
1546.Subsection (2) ensures that no charge to income tax arises at the time of the transfer of the property if the transfer is also exempt for inheritance tax purposes, or if the property transferred remains heritage property throughout. Instead, the amount chargeable to income tax is deferred and added to any income taxable on the trustees of the later HMS if an occasion of charge occurs.
1547.Accordingly, subsection (3) determines the period over which the income to be charged is measured, applying the following modifications to the provisions in section 513:
the date of the last occasion of charge of the earlier HMS (see section 513(2)(a)) is attributed to the later HMS; and
the date on which the earlier HMS took effect (see section 513(2)(b)) is likewise attributed to the later one.
1548.The result is that any income of any earlier HMS (however many tax-free transfers have occurred) will be charged on the chargeable settlement to the extent that it has not been subject to this charge already.
Section 517: Exemption for income treated as income of settlor
1549.This section excludes from the charge to income tax under section 512 income of the trustees that is treated as income of the settlor. It is based on section 694(3) of ICTA.
