188体育

ITTOIA/S633

The legislation in ITTOIA/S633 prevents certain arrangements that would allow a settlor to enjoy the income of a settlement without attracting further tax liability.

Where there is available undistributed income in a settlement and a capital sum is paid directly or indirectly for the benefit of the settlor, spouse or civil partner by the trustees, the payment is treated as the income of the settlor. The amount treated as the income of the settlor is restricted to the amount of the available undistributed income in the settlement.

鈥楥apital sum鈥� includes a loan or repayment of a loan or any other sum (other than income) which is not paid for full consideration.

Example 24 - loan from trustees to settlor

X puts 拢200,000 into a discretionary trust in favour of her minor children on 1 May 2007. The money is invested and income arises as follows.

Income amount and year	-	rate of tax	Total tax
2007-08 Income 拢15,000	Charged	拢1,000 @ 20% and听拢14,000 @ 40%	听 拢5,800
2008-09 Income 拢20,000	Charged	拢1,000 @ 20% and听拢19,000 @ 40%	听 听拢7,800
2009-10 Income 拢15,000	Charged	拢1,000 @ 20% and听拢14,000 @ 40%	听 听拢5,800
2010-11 Income 拢12,000	Charged	拢1,000 @ 20% and听拢11,000 @ 50%	听 拢5,700

No payments are made to the children so no income is treated as the income of X under ITTOIA/S629 (see TSEM4300). On 1 May 2010 X borrows 拢30,000 from the trustees. X is liable to income tax at the additional rate of 50%.

The undistributed income of the trustees is 拢36,900 (拢62,000 less the tax of 拢25,100 paid on that income). As the amount borrowed is less than the undistributed income of the trust we would treat the loan as the income of X.

The income tax charge on the settlor is based on treating the amount of the loan as income after deduction of tax at the trust rate. The grossed up amount is chargeable to income tax at the settlor鈥檚 marginal rate of tax but a notional credit is given for tax at the trust rate in force for the years in which the income arose to the trustees. The loan is matched with income of earlier years first.

Calculation of tax due	Amount and tax rate	Total
Loan to settlor	-	听拢30,000
Grossed up @ trust rate	-	听拢60,000
Tax due	拢60,000 @ 50%	听拢30,000
Less notional tax:	-	-
Years to 2009 - 10:	拢50,000 @ 40%	拢20,000
2010 - 11	拢10,000 @ 50%	拢5,000
Total notional tax	-	拢25,000
Tax due from settlor	-	拢5,000

Internal users should submit certain potential ITTOIA/S633 cases to Trusts Technical - see TSEM4402.