My right honourable friend the Paymaster General has made the following Written Ministerial Statement.

The Government intend to bring forward legislation in the Finance Bill 2007 to amend an omission that has been identified in the recent trusts modernisation legislation included in the Finance Act 2006.

Certain types of capital receipts received by trustees are treated for tax purposes in their hands as income. This includes where the trustees of a settlement receive a payment made by a company buying back its own shares. In that situation, the original legislation—Section 686A of the Income and Corporation Taxes Act 1988—provided that what was taxable was only the distribution element, and excluded the original subscription price received by the company that issued the shares.

Paragraph 3 of Schedule 13 to the Finance Act 2006 amended the existing Section 686A of the Income and Corporation Taxes Act 1988 so that in addition to its original function it introduces a common mechanism for the various types of capital receipt that are assessable to income tax in the hands of trustees receiving them to be charged at the special trust rates. There is, however, an omission in the wording of the new Section 686A, which has the result, in the situation of buy-back of shares, thatthe whole of the payment by the company to the trustees including the original subscription price is taxable and not just the element representing the distribution.

This result was not intended and therefore amending legislation will be brought forward, as part of Finance Bill 2007, to amend Section 686A appropriately. This amending legislation will be backdated to 6 April 2006, so that the position will be as it should have been from the start. The amending legislation is being drafted and will be put out to consultation.