Income Tax (Trading and Other Income) Act 2005 (c. 5)

(The document as of February, 2008)

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(ii) is applicable for the benefit of the giver, or

(iii) will, or may become, so payable or applicable.

(5) "Related property" has the same meaning in this section as in section 625.

627 Exceptions for certain types of income

(1) The rule in section 624(1) does not apply to income which--

(a) arises under a settlement made by one party to a marriage by way of provision for the other--

(i) after the dissolution or annulment of the marriage, or

(ii) while they are separated under an order of a court, or under a separation agreement, or where the separation is likely to be permanent, and

(b) is payable to, or applicable for the benefit of, the other party.

(2) The rule in section 624(1) does not apply to income which consists of--

(a) annual payments made by an individual for commercial reasons in connection with the individual's trade, profession or vocation,

(b) qualifying donations for the purposes of section 25 of FA 1990 (donations to charity by individuals), or

(3) In subsection (2)(c) "relevant pension scheme" means--

(a) a registered pension scheme,

(b) a pension scheme established by a government outside the United Kingdom for the benefit, or primarily for the benefit, of its employees (or an annuity acquired using funds held for the purposes of such a pension scheme), or

(c) any pension arrangements of any description prescribed by regulations made under section 11(2)(h) of the Welfare Reform and Pensions Act 1999 (c. 30) or Article 12(2)(h) of the Welfare Reform and Pensions (Northern Ireland) Order 1999 (S.I. 1999/3147 (N.I. 11)).

628 Exception for gifts to charities

(1) The rule in section 624(1) does not apply to any qualifying income which arises under a UK trust if--

(a) it is given by the trustees to a charity in the tax year in which it arises, or

(b) it is income to which a charity is entitled under the terms of the trust.

(2) In this section "qualifying income" means--

(a) income which is to be accumulated,

(b) income which is payable at the discretion of the trustees or any other person (whether or not the trustees have power to accumulate it), or

(3) Subsection (4) applies if in any tax year qualifying income which arises under a UK trust from different sources exceeds the total of--

(a) the amount of that income which falls within subsection (1), and

(b) the amount of that income which falls within section 630(1) (comparable exception for income of unmarried minor children of settlor).

(4) The amount of the qualifying income from different sources which falls within subsection (1) above is rateably apportioned between those sources.

(5) This does not affect the operation of any requirement that the whole, or any specified part, of the income from a particular source is to be given to a charity.

(6) In this section--

"charity" includes each of the bodies mentioned in section 507 of ICTA (the National Heritage Memorial Fund, the British Museum etc.),
"resident", in relation to the trustees of a trust, is to be read in accordance with section 110 of FA 1989 (residence of trustees), and
"UK trust" means a trust whose trustees are UK resident.

Income treated as income of settlor: unmarried children

629 Income paid to unmarried minor children of settlor

(1) Income which arises under a settlement is treated for income tax purposes as the income of the settlor and of the settlor alone for a tax year if, in that year and during the life of the settlor, it--

(a) is paid to, or for the benefit of, an unmarried minor child of the settlor, or

(b) would otherwise be treated (apart from this section) as income of an unmarried minor child of the settlor.

(2) Subsection (1) does not apply to income which is treated as income of the settlor under section 624.

(3) Subsection (1) does not apply in relation to a child's relevant settlement income in any tax year if, in that year, the total amount of that income does not exceed £100.

(4) In subsection (3) a child's "relevant settlement income" means income--

(a) which is paid to or for the benefit of, or otherwise treated as income of, the child, and

(b) which (apart from subsection (3)) would be treated as income of the settlor under subsection (1).

(5) Subsection (1) does not apply so far as provided by section 630 (exception for gifts to charities).

(6) See--

section 631 for the treatment for the purposes of subsection (1) of retained or accumulated income, and
section 632 for the treatment for the purposes of this section and section 631 of certain deemed income connected to offshore income gains.

(7) In this section and sections 631 and 632--

(a) "child" includes a stepchild,

(b) "minor" means a person under the age of 18 years, and "minor child" is to be read accordingly, and

630 Exception for gifts to charities

(1) The rule in section 629(1) does not apply to any qualifying income which arises under a UK trust if--

(a) it is given by the trustees to a charity in the tax year in which it arises, or

(b) it is income to which a charity is entitled under the terms of the trust.

(2) Subsection (3) applies if in any tax year qualifying income which arises under a UK trust from different sources exceeds the total of--

(a) the amount of that income which falls within subsection (1), and

(b) the amount of that income which falls within section 628(1) (comparable exception for income where settlor retains an interest).

(3) The amount of the qualifying income from different sources which falls within subsection (1) above is rateably apportioned between those sources.

(4) This does not affect the operation of any requirement that the whole, or any specified part, of the income from a particular source is to be given to a charity.

(5) In this section "charity", "qualifying income" and "UK trust" have the same meaning as in section 628.

631 Retained and accumulated income

(1) This section applies if--

(a) the trustees of a settlement retain or accumulate income arising under the settlement, and

(b) a payment is subsequently made in connection with the settlement to, or for the benefit of, an unmarried child of the settlor.

(2) The payment is treated for the purposes of section 629(1) as a payment of income, but only so far as there is retained or accumulated income available.

(3) For the purposes of subsection (1) a payment is made in connection with a settlement if it is made by virtue of or in consequence of--

(a) the settlement, or

(b) any enactment relating to the settlement.

(4) For the purposes of subsection (2) retained or accumulated income is available at any time when--

A > B

where--

A is the total amount of the income which has arisen under the settlement since it was made, and
B is the total amount of disregarded income.

(5) In subsection (4) "disregarded income" means any income arising under the settlement since it was made which has been--

(a) treated as income of the settlor,

(b) paid (whether as income or capital) to, or for the benefit of, a beneficiary other than an unmarried minor child of the settlor,

(d) treated as income of an unmarried minor child of the settlor, and subject to income tax, in any of the tax years 1995-96, 1996-97 and 1997-98, or

(e) applied in meeting expenses of the trustees which--

(i) were properly chargeable to income, or

(ii) would have been so chargeable but for any express provisions of the trust.

(6) For the purposes of subsection (5)(d), income arising under the settlement that is treated as income of the child is subject to income tax so far as it does not exceed the taxable amount.

(7) In subsection (6) "the taxable amount", in relation to a tax year, means the amount by which--

TI > TAD

where--

TI is the child's total income for income tax purposes, and
TAD is the total amount of allowances and deductions that may be set against the total income.

632 Offshore income gains

(1) This section applies if--

(a) an offshore income gain accrues in respect of a disposal by a trustee of assets held by the trustee for a minor, and

(b) the minor would be absolutely entitled as against the trustee but for being a minor.

(2) The income which, under section 761(1) of ICTA (charge to income tax of offshore income gain), is treated as arising by reference to that gain is treated for the purposes of sections 629 and 631 as paid to the minor.

(3) In this section "offshore income gain" has the same meaning as in Chapter 5 of Part 17 of ICTA (charge to tax of offshore income gains).

Capital sums treated as income of settlor: trustees' payments

633 Capital sums paid to settlor by trustees of settlement

(1) Any capital sum paid directly or indirectly in any tax year by the trustees of a settlement to the settlor is treated for income tax purposes as follows.

(2) The sum is treated as the income of the settlor for the tax year so far as the amount of the sum falls within the amount of income available up to the end of the year.

(3) The sum is treated as the income of the settlor for the following year so far as the amount of the sum--

(a) is not treated under subsection (2) as the settlor's income for the tax year in which it is paid, and

(b) falls within the amount of the income available up to the end of the following year.

(4) Subsection (3) also applies for each subsequent year up to a maximum of 10 years subsequent to the tax year in which the sum is paid.

(5) For this purpose the reference in subsection (3)(a) to being treated under subsection (2) as the settlor's income for the tax year in which the capital sum is paid is a reference to being treated under subsection (2) or (3) as the settlor's income for that year and any other year before the subsequent year in question.

(6) For the meaning of certain expressions used in this section, see--

section 634 (meaning of "capital sum" and "sums paid to settlor"),
section 635 (amount of available income),
section 636 (calculation of undistributed income), and
section 637 (qualifications to section 636).

(7) For other provisions, see--

section 638 (capital sums paid by way of loan or repayment of loan),
section 639 (loans to participators in close companies), and
section 640 (grossing-up of deemed income).

634 Meaning of "capital sum" and "sums paid to settlor"

(1) In this Chapter "capital sum" means--

(a) any sum paid by way of loan or repayment of a loan, and

(b) any other sum which--

(i) is paid otherwise than as income, and

(ii) is not paid for full consideration in money or money's worth.

(2) But this is subject to subsections (3) to (6).

(3) It does not include any sum which could not have become payable to the settlor except--

(a) in one of the circumstances mentioned in subsection (2) of section 625, or

(b) on the death under the age of 25 of any person of the kind mentioned in subsection (3) of that section.

(4) It does include a sum treated as a capital sum by subsection (5) below.

(5) Any sum which--

(a) is paid by the trustees of a settlement to a third party--

(i) at the settlor's direction, or

(ii) as a result of the assignment by the settlor of the settlor's right to receive the sum, or

(b) is otherwise paid, or applied by, the trustees for the benefit of the settlor,

is treated as a capital sum paid to the settlor by the trustees.

(6) Subsection (5) does not apply to any sum which would, apart from that subsection, be treated as a capital sum paid to the settlor.

(7) References in sections 633 to 638 to sums paid to the settlor include references to sums paid to--

(a) the spouse of the settlor, or

(b) the settlor (or the spouse of the settlor) jointly with another person.

635 Amount of available income

(1) For the purposes of section 633 the amount of income available up to the end of any tax year is, in relation to any capital sum paid as mentioned in subsection (1) of that section by the trustees of a settlement, calculated as follows.

(2) Add together the amount of income arising under the settlement in that year and any previous year which has not been distributed.

(3) Deduct from that figure--

(a) the amount of that income taken into account under section 633 in relation to that sum in any previous year or years,

(b) the amount of that income taken into account under section 633 in relation to any other capital sums paid to the settlor in any year before that sum was paid,

(c) any income arising under the settlement in that year or any previous year which has been treated as income of the settlor under section 624 or 629, and

(d) an amount equal to the sum of tax at the rate applicable to trusts on--

(i) the total amount of income arising under the settlement in that year and any previous year which has not been distributed, less

(ii) any income of the kind mentioned in paragraph (c).

(4) See sections 636 and 637 for how to calculate amounts of undistributed income.

636 Calculation of undistributed income

(1) For the purposes of section 635, income arising under a settlement in any tax year is treated as income which has not been distributed so far as it exceeds the total amount of--

(a) the sums to which subsection (2) applies,

(b) the expenses to which subsection (4) applies, and

(2) This subsection applies to such sums paid in the tax year to any persons by the trustees of the settlement as--

(a) are treated in that year (otherwise than under section 633) as the income of those persons for income tax purposes, or

(b) would be so treated if those persons were domiciled, resident and ordinarily resident in the United Kingdom and the sums had been paid to them there.

(3) Subsection (2) is subject to section 637(1).

(4) This subsection applies to any expenses of the trustees of the settlement paid in the tax year which, in the absence of any express provision of the settlement, would be properly chargeable to income.

(5) Subsection (4)--

(a) does not apply to expenses so far as they are included in the sums mentioned in subsection (2), and

(b) is subject to section 637(2) to (7).

(6) This subsection applies to the amount by which--

A > B

where--

A is any income arising under the settlement in the tax year in respect of which exemption from tax may be granted under section 505 of ICTA (charities: general), and
B is the total amount of any such sums or expenses as are mentioned in subsections (2) and (4) paid in that year which are properly chargeable to the income.

637 Qualifications to section 636

(1) Section 636(2) does not apply--

(a) to any interest paid by the trustees of the settlement, or

(b) to any sums paid to--

(i) a body corporate connected with the settlement, or

(ii) the trustees of another settlement made by the settlor or by the trustees of the settlement.

(2) Section 636(4) applies to any interest paid by the trustees of the settlement subject to subsections (3) to (7).

(3) The whole of any interest paid by the trustees of the settlement is excluded from subsection (4) of section 636 if no sums within subsection (2) of that section were paid to any person other than the settlor or the spouse of the settlor.

(4) If any sum within section 636(2) was so paid, the relevant fraction of any interest paid by the trustees of the settlement is excluded from section 636(4).

(5) The relevant fraction is--

---

where--

A is the whole of the income arising under the settlement in the tax year, less the sums referred to in subsection (4) of section 636 apart from subsections (2), (3) and (6) of this section, and
B is so much of the sums within subsection (2) of that section as is paid to persons other than the settlor or the spouse of the settlor.

(6) Subsections (2) to (5) do not apply to--

(a) interest in respect of which relief from tax is allowable under any provision of the Income Tax Acts, or

(b) interest payable to the settlor or the spouse of the settlor if living with the settlor.

(7) Nothing in subsections (2) to (6) affects the liability to tax of the person receiving or entitled to the interest.

(8) For the purposes of this Chapter, a body corporate is treated as connected with a settlement in any tax year if at any time in that year--

(a) it is a close company (or only is not a close company because it is non-UK resident) and the participators then include the trustees of the settlement, or

(b) it is controlled by a company falling within paragraph (a).

Trustees' payments: further provisions

638 Capital sums paid by way of loan or repayment of loan

(1) No part of a capital sum which is paid to a settlor by way of loan is treated under section 633 as the settlor's income for any tax year after the tax year in which the whole of the sum is repaid.

(2) Subsection (3) applies if--

(a) a capital sum is paid to the settlor by way of loan, and

(b) one or more capital sums have previously been paid to the settlor by way of loan and wholly repaid.

(3) The amount of the capital sum mentioned in subsection (2)(a) is treated for the purposes of section 633 as equal to the amount (if any) by which it exceeds so much of the capital sum or sums previously paid as has already been treated as the settlor's income under that section.

(4) Subsection (5) applies if--

(a) a capital sum is paid to the settlor by way of complete repayment of a loan, and

(b) an amount not less than the capital sum is subsequently lent by the settlor to the trustees of the settlement.

(5) No part of the capital sum is treated under section 633 as the settlor's income for any tax year after that in which the further loan is made.

639 Loans to participators in close companies

(1) This section applies if any amount has been included in a person's income under Chapter 6 of Part 4 (release of loan to participator in close company) in respect of any loan or advance.

(2) There is a corresponding reduction in the amount (if any) afterwards falling to be so included under section 633 in respect of the loan or advance.

640 Grossing-up of deemed income

(1) The whole or any part of a capital sum which is treated under section 633 as income of the settlor for any tax year is treated as income of an amount equal to the sum or the part of the sum, grossed up by reference to the rate applicable to trusts for that year.

(2) The deductible amount is to be set off against the amount of tax charged on any amount treated under section 633 as income of the settlor for any year.

(3) In subsection (2) the "deductible amount" is an amount equal to--

(a) tax at the rate applicable to trusts for the year on the amount treated under section 633 as the settlor's income,

(b) so much of the amount of tax at that rate as is equal to the tax charged, or

(c) the amount of tax paid by the trustees on the grossed-up amount of so much of the amount of income available up to the end of the year, in relation to the capital sum, as is taken into account under section 633 in relation to that sum in that year (see subsections (4) to (7) below),

whichever is the least.

(4) For the purposes of subsection (3)(c)--

(a) any reduction falling to be made under section 635(3)(d) is treated as made against income arising under the settlement in an earlier tax year before income arising under the settlement in a later tax year, and

(b) income arising under the settlement in an earlier tax year is treated as taken into account under section 633 before income arising under the settlement in a later tax year.

(5) For the purposes of subsection (3)(c)--

(a) the grossed-up amount of any sum is an amount equal to the sum, grossed up by reference to the appropriate rate for each part of the sum, and

(b) the amount of tax paid by the trustees on that grossed-up amount is the difference between the grossed-up amount and the sum in question.

(6) For the purposes of subsection (5)--

(a) the appropriate rate for any part of a sum is 0% if--

(i) the income that falls to be treated in accordance with subsection (4) as representing that part of the sum is income from a source outside the United Kingdom, and

(ii) the trustees were non-UK resident for the relevant tax year, and

(b) the appropriate rate for any part of a sum in relation to which paragraph (a) does not apply is--

(i) 34%, if the relevant tax year is the year 2003-04 or any earlier tax year, and

(ii) 40%, if the relevant tax year is the year 2004-05 or any subsequent tax year.

(7) In subsection (6) "the relevant tax year", in relation to any part of a sum, means the tax year in which the income treated in accordance with subsection (4) as representing that part of the sum arose under the settlement.

Capital sums treated as income of settlor: connected bodies

641 Capital sums paid to settlor by body connected with settlement

(1) This section applies if--

(a) a capital sum is paid to the settlor in a tax year by any body corporate connected with the settlement in that year, and

(b) an associated payment has been, or is, made directly or indirectly to the body by the trustees of the settlement.

(2) The capital sum is, in accordance with this section, treated for the purposes of section 633 as having been paid to the settlor by the trustees of the settlement.

(3) A capital sum to which subsection (2) applies is treated as having been paid to the settlor in the tax year in which it is paid so far as the amount of the sum falls within the total of the associated payment or payments made up to the end of the year.

(4) A capital sum to which subsection (2) applies is treated as having been paid to the settlor in the following year so far as the amount of the sum--

(a) is not treated as paid to the settlor in the year mentioned in subsection (3), and

(b) falls within the total of the associated payment or payments made up to the end of the following year (less what was taken into account under subsection (3) in relation to the sum in the previous year).

(5) Subsection (4) also applies for each subsequent year.

(6) In its application to a subsequent year--

(a) the references to the following year are to the subsequent year,

(b) the reference to the year mentioned in subsection (3) is to that year and any other year before the subsequent year, and

(c) the reference to what was taken into account under subsection (3) in relation to the sum in the previous year is to what was taken into account under this section in relation to the sum in the previous years.

(7) See also--

section 642 (exception for certain loans or repayments of loans), and
section 643 (interpretation of sections 641 and 642).

642 Exception for certain loans or repayments of loans

(1) Section 641 does not apply to any sum paid to the settlor by way of loan or repayment of a loan if conditions A and B are met.

(2) Condition A is that the whole of the loan is repaid within 12 months of the date on which it was made.

(3) Condition B is that the period for which amounts are outstanding in respect of relevant loans in any period of 5 years is not more than 12 months.

(4) In subsection (3) "relevant loans" means loans made--

(a) to the settlor by the body corporate connected with the settlement or by any other body corporate so connected, or

(b) by the settlor to the body corporate connected with the settlement or to any other body corporate so connected.

643 Interpretation of sections 641 and 642

(1) Any question in section 641 or 642 whether a capital sum has been paid--

(a) to the settlor by a body corporate, or

(b) to a body corporate by the trustees,

is determined in the same way as any question under section 633 whether a capital sum has been paid to the settlor by the trustees.

(2) For the circumstances in which a body corporate is treated for the purposes of this Chapter as connected with a settlement, see section 637(8).

(3) In section 641 and this section "associated payment", in relation to any capital sum paid to the settlor by a body corporate, means--

(a) any capital sum paid to the body by the trustees of the settlement, and

(b) any other sum paid, or asset transferred, to the body by the trustees which is not paid or transferred for full consideration in money or money's worth,

being any sum paid, or asset transferred, in the 5 years ending or beginning with the date on which the capital sum is paid to the settlor.

(4) For the purposes of sections 641 and 642 and this section any capital sum paid by a body corporate, and any associated payment made to a body corporate, at a time when it is (within the meaning of section 416 of ICTA) associated with another body corporate may be treated as paid by, or made to, the other body corporate.

Settlements by two or more settlors

644 Application to settlements by two or more settlors

(1) In the case of a settlement where there is more than one settlor, this Chapter has effect in relation to each settlor as if that settlor were the only settlor.

(2) This works as follows.

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