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HMRC internal manual

Company Taxation Manual

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HM Revenue & Customs
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Close companies: capital payments to settlors: interposition between settlor and trustee

ITTOIA/S641

It is possible to interpose a close company between a settlor and the trustee of his or her settlement and thus avoid ITTOIA/S633. To prevent this, ITTOIA/S619 (1)(d) together with ITTOIA/S641 extends the scope of Section 633 to cover certain payments (to settlors/spouses) to the extent that the payment can be matched by an associated payment to a close company (whose participators include the trustees of the settlement) by the trustees of the settlement. Where:

  • a close company, whose participators include the trustees of a settlement, (or a company controlled by such a close company) pays a capital sum to the settlor or spouse, and
  • an associated payment (CTM61120) has been or is made by the trustees of the settlement to the company, and
  • there is available undistributed income in the settlement (as for Section 633), then
  • the capital sum paid to the settlor (or spouse) is treated as the settlor’s income.

The types of payment caught by Section 641 are:

  • loans,
  • repayment of loans,

or

  • other capital payments (see CTM61070) made to a settlor or his/her spouse by a close company whose participators include the trustees of the settlement.

Certain temporary payments are excluded. These are detailed in CTM61090.

Section 641 also covers payments made to a settlor or his/her spouse by a close company which is associated (within the meaning of CTA2010/S449 (formerly ICTA88/S416)) with a close company which is itself connected with the settlement.

For the purposes of the section:

  • a participator has the meaning indicated in CTA2010/S454 (formerly ICTA88/S417) (CTM60100 onwards),
  • control has the meaning given in CTA2010/S1124 (formerly ICTA88/S840).

See TSEM4410 for an example.

If you have a case in which Section 641 appears to apply, refer to HMRC Trusts Bootle.