Settlements legislation: capital sums paid to settler: instructions about ITTOIA/S641
- a close company, whose participators include the trustees of a settlement, pays a capital sum to the settlor, spouse or civil partner, and
- an associated payment 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 ITTOIA/S633),
the capital sum paid to the settlor, or civil partner, is treated as the settlor’s income.
Example 25 - loan from trustees to company linked to company payment to settlor
The shares in a close company, X Ltd. are owned 75% by Mr X, 15% by Mrs. X and 10% by the X Family Settlement. Mr X was the settlor of the trust. Mr X has a long-standing £50,000 credit on his loan account with the company. The trustees have accumulated income of £20,000 and lend £10,000 to the company. Mr X withdraws £12,000 from his loan account with the company. The repayment of the loan to Mr X represented a capital sum. To the extent that it could be matched with the undistributed income of the trust (£20,000) and the associated payment by the trustees to the company (£10,000), it would be treated as the income of Mr X for all tax purposes. We would therefore treat £10,000 as the income of Mr X.
Submission to HMRC Trusts & Estates Technical Edinburgh
As for ITTOIA/S633, where a loan is matched wholly with income arising to trustees in years when the trust rate was the same as in the year the loan was made there will be no liability on the settlor as the notional tax relief will fully cover the charge and a submission is not required (see TSEM4402).
For all other cases, HMRC Trusts & Estates Technical Edinburgh is responsible for determining whether liability arises under ITTOIA/S641. Before making the submission you should first check that the three conditions in the above bullets are all met. You should then prepare a schedule showing the amount of income and distributions in each year, the capital sums paid by the trustees and the corresponding payments made by the company to the settlor.