Annex 1: Minor changes in the law made by the Act: Change 116: Interest from FOTRA securities held on trust: section 715
This change gives statutory effect to a practice relating to interest arising from FOTRA securities held on trust.
FOTRA exemptions apply where gilt-edged securities are in the beneficial ownership of persons who are not ordinarily resident in the United Kingdom. The source legislation, principally section 154 of FA 1996, is rewritten in Chapter 6 of Part 6 of this Act. The beneficial ownership test lies within the definition of “FOTRA security”: as it is part of the exemption condition of the securities. (See, in particular, section 22 of F(No 2)A 1931).
Although in the case of bare trusts and trusts with an interest in possession, it is fairly clear where the beneficial ownership lies, in the case of discretionary or accumulation trusts it can be difficult to apply the beneficial ownership test. In some types of trust the beneficial ownership of an asset is, in effect, in suspense. In others, while it may be clear where the beneficial ownership lies, it may belong to a different person from the person entitled to the income.
In practice, where interest from FOTRA securities held in trust arises to trustees and none of the beneficiaries of the trust is ordinarily resident in the United Kingdom, the beneficial ownership test is regarded as met whatever kind of trust is involved and no account is taken of whether the trustees themselves are resident or ordinarily resident. So if all the potential beneficiaries of a discretionary or accumulation trust (that is, those who have the right, at the discretion of the trustees, to benefit from the trust income or accumulated income) are not ordinarily resident in the United Kingdom, the FOTRA beneficial ownership test is treated as having been met.
Section 715 of this Act gives effect to this practice. So, for the purposes of determining whether interest arising from a FOTRA security held in trust is exempt from income tax under section 714 of this Act, it is to be assumed that the security is in the beneficial ownership of a person who is not ordinarily resident if none of the beneficiaries of the trust is resident when the interest arises. (See section 715(1) and (2)). Section 715(3) defines “beneficiaries of the trust” widely so as to cover all potential income beneficiaries of discretionary and accumulation trusts. Section 715(4) brings in beneficiaries receiving accumulated income.
This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with current practice.