beta This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

Trusts, Settlements and Estates Manual

Settlements legislation: trustee or beneficiary entitled to share tax repayment

Where the operation of the settlements legislation results in a repayment to the settlor in excess of any repayment otherwise due, the settlor should pay that excess to the trustee or other person who received the income. For years to 2009-10, the settlor was obliged to pass any repayment made in respect of settlement where that arose because of an ‘allowance or relief’ set against that income. For 2010-11 onwards the legislation was amended so that it applies to such a repayment of tax for any reason. The change was made because it was recognised that the increase in the trust rate to 50% would result in many settlors receiving repayments of tax paid by the trustees. Tax paid by trustees will usually be that paid on their income under ITTOIA/S646(8) but it will also include any money they may have paid to the settlor under ITTOIA/S646(1) (see TSEM4505)).

ITTOIA/S624 and 629 are deeming provisions. In recognition of the fact that a settlor will be taxed on income that does not belong to him or her, ITTOIA/S646(1) provides for the trustees to provide the settlor with money to enable him or her to pay the tax due to HMRC. Where the tax paid by the trustees exceeds that due from the settlor, he or she is required to return the excess to the trustees. The amount of tax to be returned to the trustees will be:

Tax paid by trustees under ITTOIA/S646(8)


Any money to pay tax provided to the settlor under ITTOIA/S646(1)


The amount of tax charged on the settlor in respect of settlement income

It is not necessary for an actual repayment to be made for the legislation to apply. The reference to a ‘repayment’ includes a set-off of tax ultimately borne by the trustees.


Trustees’ income in 2010-11

Property income £10,000
Tax paid (646(8)) £1,000 @ 20%
  £9,000 @ 50%
Total tax paid £4,700

Settlor’s income in 2010-11

Income from Property £50,000
‘Settlement’ Income £10,000

Tax due from settlor

£6,475 (personal allowance) Nil  
£37,400 @ 20% £7,480  
£16,125 @ 40% £6,450 (includes £4,000 on settlement income)
Total Tax due £13,930  
Less tax credit from trustees £4,700  
Tax due per settlor’s self assessment £9,230  

Here there will be no actual repayment made by HMRC but the tax due from the settlor is reduced by the tax credit of £4,700 of which only £4,000 has been used against settlement income. £700 should be paid by the settlor to the trustees. That is made clearer if we consider the tax position of the settlor in the absence of the settlement income:

Settlor’s income in 2010-11

Income from Property £50,000

Tax due from settlor

£6,475 (personal allowance) Nil
£37,400 @ 20% £7,480
£6,125 @ 40% £2,450
Total Tax due £9,930
Tax due per settlor’s self assessment £9,230

The £700 difference between £9,930 and £9,230 is the tax ‘overpaid’ by the trustees

For years 2010-11 onwards, ITTOIA/S646 is amended so that if the settlor has difficulty in working out the amount of the ‘repayment’ to be paid to the trustees he or she can require HMRC to issue a certificate showing the amount of the repayment due to the settlor in respect of the income treated as belonging to him or her. If you are approached by the trustees you must not divulge information concerning the settlor’s tax affairs without the permission of the settlor.

To request a certificate the settlor should submit a copy of form R185(Settlor) or any other notification of income and tax paid by the trustees to the settlor. You will not be able to issue the certificate until the settlor’s liability for the year has been calculated, i.e. their tax return or R40 has been processed.

The R185(Settlor) should confirm the information already declared on the tax return or R40. If the total liability for the year has been calculated the certificate can be issued.