Commentary on Sections Section 2: Classification of certain corporate distributions as capital
32.Subsection (1) provides that where a trust receives a tax-exempt corporate distribution (as defined in subsection (3)) it is to be treated as a receipt of capital, rather than income. If it is received by a private trust for interests in succession, the distribution will therefore be held as capital rather than being paid out to the income beneficiary; and where the shareholders are the trustees of a charity with permanent endowment, the distribution will be held as capital by the trustees and added to the permanent endowment. “Distribution” here includes a distribution of assets, whether in cash or otherwise, and whether by dividend or otherwise.
33.This classification applies to all trusts, including those established before the commencement of the section (subsection (6)). It is subject to contrary intention in the trust instrument, or in any power by which the trust was established, as to the classification of such receipts (subsection (2)).
34.Subsections (1) and (3)(a) change the classification of shares distributed to a trust by way of dividend in the course of a demerger. They do so by reference to distributions falling within sections 1076, 1077 and 1078 of the Corporation Tax Act 2010, which provide that shares distributed in the course of certain direct or indirect demergers are exempt from income tax (they are “exempt distributions”). The effect of subsections (1) and (3)(a) of the section is that such shares are to be regarded as capital in the hands of trustee shareholders.
35.Subsection (3)(b) gives the Secretary of State a power to specify by order other tax-exempt distributions by corporate bodies which are to be treated as a receipt of capital by trustees.
36.Subsections (4) and (5) limit the Secretary of State’s power to make such an order by statutory instrument subject to a negative resolution procedure (subsection (5)). Subsection (4) provides that such an order can only be made where the distribution is not subject to income tax or capital gains tax, for example where an exemption from tax, similar to that applicable to distributions to which subsection (3)(a) applies, is extended to other corporate receipts.