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HMRC internal manual

Trusts, Settlements and Estates Manual

Settlements legislation: capital sums paid to settlor: 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.

‘Capital sum’ 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 £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.

2007-08 Income £15,000 Charged £1,000 @ 20% £14,000 @ 40%  
Tax = £5,800        
  2008-09 Income £20,000 Charged £1,000 @ 20% £19,000 @ 40%  
Tax = £7,800        
  2009-10 Income £15,000 Charged £1,000 @ 20% £14,000 @ 40%  
Tax = £5,800      
  2010-11 Income £12,000 Charged £1,000 @ 20%
£11,000 @ 50%  
Tax = £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 £30,000 from the trustees. X is liable to income tax at the additional rate of 50%.


The undistributed income of the trustees is £36,900 (£62,000 less the tax of £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’s 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.

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


Certain potential ITTOIA/S633 cases should be submitted to HMRC Trusts & Estates Technical Edinburgh- see TSEM4402.