Chapter 5: Settlements: amounts treated as income of settlor
2385.This Chapter rewrites the settlements legislation in Chapters 1A and 1B of Part 15 of ICTA. This legislation prevents the avoidance of tax where a person (the settlor) arranges for his or her income to be received by someone who is either chargeable to tax at a lower rate than the settlor, or not chargeable to tax at all. The legislation operates by treating the income as if it were the settlor’s. The legislation operates where:
the settlor retains an interest in property but the income from that property is received by another;
payments from a settlement set up by the settlor are made to a minor child of the settlor; or
payments are made to the settlor from the settlement in the form of capital rather than income.
Section 619: Charge to tax under Chapter 5
2386.This section charges to tax payments, whether income or capital, which are deemed to be the income of the settlor under this Chapter. It also provides that the part which represents distributions attracts the dividend ordinary rate. It is based on sections 660C and 677 of ICTA.
2387.Subsection (1) charges to tax the income and capital payments which are treated as the income of the settlor under this Chapter. It rewrites the charges under sections 660C and 677(7) of ICTA. Section 660C(1) of ICTA, which charges income treated as the settlor’s because he or she retains an interest in the settlement or because of payments etc to a minor child, imposes a Schedule F charge on distributions and a charge under Schedule D Case VI on other income. Section 677(7) of ICTA, which charges capital payments treated as the settlor’s income, imposes a Case VI charge on all such payments. The listing in this subsection of the amounts treated as income acts as an introduction to the Chapter and explains the nature of the charge under the Chapter.
2388.Subsection (3) lists the income that is to be treated under subsection (2) as within section 1A(2)(b) of ICTA. The income is all distribution income or income treated as such. The effect of this provision is that this income is charged at the dividend ordinary rate (the Schedule F ordinary rate). The income within section 660C(1A), which this subsection rewrites, is included here as follows:
(1A)(a) is rewritten at (3)(a);
(1A)(b) is rewritten at (3)(b) and (e);
(1A)(f) is rewritten at (3)(c); and
(1A)(g) is rewritten at (3)(d).
2389.Section 660C(1A)(c) to (e) has not been listed because it is unnecessary. The income within section 233(1), (1A) and (1B) of ICTA is already included within section 660C(1A)(a) as “income chargeable under Schedule F”. Such income is included within subsection (3)(a) of this section since Chapter 3 of Part 4 of this Act rewrites the Schedule F charge.
2390.Section 660C(1A)(b) of ICTA includes income to which section 1A of ICTA applies “by virtue of it being equivalent foreign income falling within subsection (3)(b) [of section 1A of ICTA] and chargeable under Case V of Schedule D”. The “equivalent foreign income” within that subsection is dividends or other distributions of a non-UK resident company which would be chargeable under Schedule F if that company were resident in the UK. Because Chapter 4 of Part 4 of this Act charges foreign dividends and not foreign distributions, subsection (4) provides that any such foreign distributions falling outside that Chapter are included within section 619(3)(e) because they would, if the company were UK resident, fall within Chapter 3 of that Part. Chapter 3 of Part 4 of this Act rewrites the Schedule F charge on both dividends and distributions of a UK resident company.
Section 620: Meaning of “settlement” and “settlor”
2391.This section explains the meaning of “settlement” and “settlor” for the purposes of this Chapter. It is placed in this part of the Chapter to help the reader by giving an early indication of the nature of the charge under this Chapter. It is based on sections 660G and 677 of ICTA.
Section 621: Income charged
2392.This section sets out the amount charged to tax. It is based on sections 69, 660C and 677 of ICTA.
2393.All the income and capital payments which are to be treated as the settlor’s income are chargeable to tax.
2394.The income to be treated as the settlor’s income under section 624 is the income arising under the settlement. The meaning of income arising under a settlement is given in section 648. Subsection (1) of that section provides that income arising under a settlement includes income chargeable to income tax by deduction or otherwise and, in the case of income from outside the United Kingdom, income which would be chargeable if received by a UK resident. In consequence the appropriate measure of income chargeable and the tax year of charge are provided by the charging sections of other Chapters of this Act (or the appropriate sections of the Income Tax Acts).
2395.Section 648(2) provides that where the settlor is non-domiciled etc and the settlement is entitled to income which would not be chargeable on the settlor if he or she made a claim for the remittance basis to apply, it is excluded from income arising under a settlement and is therefore not chargeable on the settlor.
2396.The amount of income arising under a settlement which is treated as the settlor’s income under section 629 and the year of charge are given in subsection (1) of that section.
2397.The amount to be treated as the settlor’s income under section 633 and the year of charge are given in subsection (1) of that section.
Section 622: Person liable
2398.This states who is liable for any tax charged. It is based on sections 660A, 660B and 677 of ICTA.
2399.Section 660A(1) of ICTA provides that income charged on the settlor is not treated as the income of any other person. Since that person could be a company, and outside the scope of this Act, new section 660C(4) of ICTA (see paragraph 272(4) of Schedule 1 to this Act) ensures that a charge cannot be made on a company in respect of that income.
Section 623: Calculation of income
2400.This section allows the settlor the same deductions and reliefs as if he had received as income the amount on which he is chargeable. As a result of this the settlor is charged to tax as if he had received the income arising under the settlement directly. It is based on sections 660C and 677 of ICTA. Section 660C(3) of ICTA is not rewritten in this Act.
Section 624: Income where settlor retains an interest
2401.This is the first of the rules under which income is treated as the settlor’s. Where the settlor retains an interest in settled property the income arising under the settlement is treated as the settlor’s. The section is based on section 660A of ICTA.
Section 625: Settlor’s retained interest
2402.This section explains when a settlor is treated as having an interest in property for the purposes of section 624 and exceptions to this. It is based on section 660A of ICTA.
2403.Subsection (1) explains what is meant by a settlor having an interest in property. The interests may also be those of the settlor’s spouse.
2404.Subsections (2) and (3) give occasions where a settlor does not have an interest in property. The exceptions cover instances when the settlor may by inadvertence or circumstances likely to be outside his or her control have an interest in property which he or she has settled or an interest in property derived from that property. These circumstances include bankruptcy, where the settlor may obtain an interest in property as a result of the bankruptcy of another person who has an interest in that property. This might occur where the beneficiary of a settlement, who is also the creditor of the settlor, becomes bankrupt and the debt is settled by a payment of settlement income from the bankrupt’s estate.
2405.The settlor is also excluded from having an interest in property as long as someone under the age of 25 years is alive during whose lifetime that property cannot be payable to the settlor other than in a bankruptcy or by assigning or charging the individual’s interest in the property. While there is no requirement that the person under 25 years should have an interest in that property it may generally be expected that they will.
2406.Subsection (5) provides the meaning of “related property” (“derived property” in section 660A(10) of ICTA). When this clause was drafted the House of Lords’ decision in West v Trennery (2005), TL 3747(16) on the interpretation of “derived property” in section 77(8) of TCGA was not available. The definition of “derived property” in that section is the same as in section 660A(10) of ICTA. In consequence the section closely follows the source legislation.
Section 626: Exception for outright gifts between spouses
2407.This section provides an exception to the rule in section 624 for an outright gift of property between spouses which gives rise to income. Such gifts are within the exclusion as long as the property gifted is more than simply a right to income and the right to income is a right to the whole of the income. The section is based on section 660A of ICTA.
Section 627: Exceptions for certain types of income
2408.This section provides that section 624 does not apply to certain income between former parties to a marriage and to commercial and charitable payments and pension contributions. It is based on section 660A of ICTA.
2409.Subsection (1) enables a person to make a settlement that benefits a former or separated spouse without that income being treated as income of the settlor.
2410.Subsection (3)(c) refers to regulations made under the Welfare Reform and Pensions Act 1999 and its equivalent in Northern Ireland although section 660A(11)(c) of ICTA (inserted by paragraph 28 of Schedule 35 to FA 2004) simply refers to regulations made by the Secretary of State. See Change 105 in Annex 1.
2411.Subsection (3) applies for the tax year 2006-07 onwards and rewrites the changes to section 660A(11) of ICTA introduced by FA 2004. A transitional rule is found in paragraph 132 of Schedule 2 to this Act which gives the rules for “approved pension arrangements” for 2005-06. The FA 2004 changes to pension provisions only apply from 2006-07.
Section 628: Exception for gifts to charities
2412.This section provides that certain charitable donations will not be treated as the settlor’s income under section 624. It is based on section 44 of FA 2000.
2413.Section 44 of FA 2000 applies to the charge under both sections 660A and 660B of ICTA (settlor-interested trusts and payments to a minor child of the settlor). Section 44 of FA 2000 is rewritten in two places in this Chapter, once as an exemption from the charge under section 624 and secondly as an exemption from the charge under section 629. (A payment may, for example, be made by trustees to a charity which benefits a minor child of the settlor.) Subsection (3)(b), which includes within the sum paid to a charity sums for which the exemption in section 630 applies, covers the possibility, unlikely though it may be, of a trust changing its nature during a tax year whereby it is no longer a settlor-interested trust and thus one to which section 630 might apply. (A charge under that section will not apply if a charge under section 624 applies.) Any charitable payments exempted from a charge on the settlor under section 629 must be included to give the correct result.
Section 629: Income paid to unmarried minor children of settlor
2414.This section provides the second charge under this Chapter. Income paid to or for the benefit of an unmarried minor child of the settlor or income which is treated as that child’s income is charged as income of the settlor if it does not already fall within section 624. The section is based on section 660B of ICTA.
2415.Subsection (1) sets out the basic rule. Subsection (1)(b) ensures that avoidance cannot arise by using a bare trust arrangement where a child is a beneficiary of the trust, although no income is paid to or for the child’s benefit.
2416.Subsection (2) provides that a charge under section 624 will always take precedence over a charge under this section.
2417.See paragraph 133 of Schedule 2 to this Act for the application of this section in relation to income arising under a settlement made before 9 March 1999 or from funds provided before that date.
2418.Section 660B(1) of ICTA provides that income charged on the settlor is not treated as the income of any other person. Since that person could be a company, and outside the scope of this Act, new section 660C(4) of ICTA (see paragraph 272(4) of Schedule 1 to this Act) ensures that a charge cannot be made on a company in respect of that income.
Section 630: Exceptions for gifts to charities
2419.This section provides that certain charitable donations will not be treated as the settlor’s income under section 629. This exemption might apply in the unusual circumstances of a charity benefiting the minor child of a settlor, that is to say that payments out of the settlement to the charity were paid to or applied for the benefit of the settlor’s minor child. The section is based on section 44 of FA 2000.
2420.See the commentary on subsection (3)(b) of section 628 as to how subsection (2)(b) of this section applies.
Section 631: Retained and accumulated income
2421.This section applies the rule in section 629 where payments are made to or for the benefit of a minor child of the settlor out of a settlement under which income is retained or accumulated. It is based on section 660B of ICTA.
2422.Subsection (1) provides the general rule. The payment must be made in connection with the settlement out of a trust under which income may be retained or accumulated. The distinction in trust law between “retained” and “accumulated” income (income the trustees have resolved to treat as capital) has been retained.
2423.Subsection (2) provides that such payments are treated as payments of income even though out of capital as long as there is sufficient accumulated or retained income available to make the payment in question.
2424.Subsection (4) sets out what is meant by available retained or accumulated income in subsection (2). Income that has arisen under the settlement must exceed the amounts set out in subsection (5). These are amounts that have been paid out in expenses or already treated as the income of the settlor or another person, including a minor child of the settlor.
2425.Subsections (6) and (7) provide the computation for income subject to income tax of a minor child of the settlor for the purposes of subsection (5)(d). One first computes a figure for the whole of the child’s income from all sources less allowances and deductions and then compares that with the sums treated as the child’s income under the settlement. If the income less allowances is sufficient to include the child’s income from the settlement then that income is deemed to have been subject to tax, ie the settlement income is treated as the top slice of the child’s income.
Section 632: Offshore income gains
2426.This section provides that gains under the offshore funds legislation are deemed to be paid to a minor where they would have been considered as his or her income were it not for his or her minority. (Section 761(1) of ICTA provides that where there is a disposal in an offshore trust the gain is treated as income of the person disposing of it.) The section is based on section 660B of ICTA.
Section 633: Capital sums paid to settlor by trustees of settlement
2427.This section provides the third charge under this Chapter. It treats as income of the settlor capital sums paid or lent to the settlor by the trustees of the settlement where those payments are matched by undistributed income within the settlement. It is based on section 677 of ICTA.
2428.Subsection (1) and (2) provide the basic rule that capital payments to the settlor are treated as his or her income where there is sufficient available income within the settlement up to the end of that tax year to cover that payment.
2429.Subsection (3) deals with the situation where there is insufficient available income up to the end of the year in which the loan is made. One then takes into account the available income for the following year to the extent that it has not been treated as the settlor’s income following a capital payment made in that year. If there is still insufficient available income one takes into account the available income for the year after that and so on.
2430.Subsection (4) allows the rule in subsection (3) to run for up to 10 years subsequent to the capital payment.
Section 634: Meaning of “capital sum” and “sums paid to settlor”
2431.This section provides the meaning of two terms used in section 633. It is based on section 677 of ICTA.
2432.Subsection (1) explains what is meant by “capital sum”. It includes sums paid as a loan, loans repaid or sums paid to the settlor or his or her spouse (see subsection (7)) in excess of the market value of goods or services. Settlors cannot therefore avoid tax by extracting income from a settlement in the form of a capital payment by the receiving of loans from the settlement, by the making of loans which are invested by the trustees and then receiving repayment of those loans, or by selling to the trustees of the settlement an item in excess of market value.
2433.Subsection (3) excludes sums from being treated as capital sums which are broadly outside the control of the settlor (see commentary on section 625(2)).
2434.Subsection (5) prevents a settlor from avoiding a charge under this section by arranging for the trustees to pay a capital sum to a third party from which the settlor may benefit.
Section 635: Amount of available income
2435.This section explains what is meant by available income for the purposes of section 633. It is based on section 677 of ICTA.
2436.Subsections (2) and (3) give the rules for ascertaining available income. It is the income arising under the settlement which has not been distributed, less sums which have already been taken into account under this rule as a capital payment in a previous year or which have been treated as the settlor’s income under sections 624 or 629 or which represent an amount of tax paid on undistributed settlement income.
2437.Section 677(2) of ICTA, on which subsection (3) is based, excludes from the measure of available income such income as has been treated as income of the settlor in tax years before 1995-96 under provisions which have been repealed. These paragraphs of section 677(2) of ICTA are rewritten in paragraph 134 of Schedule 2 to this Act.
Section 636: Calculation of undistributed income
2438.This section explains for the purposes of section 635 what is meant by income arising under a settlement that has not been distributed. It is based on section 682 of ICTA.
2439.Subsection (1) provides the basic rule with the detail in the remaining subsections. The amounts which may be set against the income arising are classified under three headings which are set out in subsections (2), (4) and (6).
Section 637: Qualifications to section 636
2440.This section gives special provisions that apply to payments made by the trustees in section 636(2) to (6) and which would otherwise be available to reduce the undistributed income within the settlement. It is based on section 682 of ICTA.
2441.Subsection (1) disapplies section 636(2) for payments of interest or payments to connected bodies corporate or other settlements. Such payments are not therefore to be treated as sums which have been distributed under that section.
2442.The purpose of subsections (2) to (7) is to prevent certain payments of interest that would not be allowable against tax from reducing the undistributed income. Interest payments that are allowable for tax purposes will already have been allowed in arriving at the income arising under the settlement.
2443.Disallowable interest payments should not be available to reduce the income treated as the settlor’s income. Without special rules loan interest payable by the trustees, which would not be allowed for tax purposes, could reduce the undistributed income and hence the amount chargeable on the settlor.
2444.Interest can only reduce the amount available for distribution to the extent that it represents an expense against income payments to persons other than the settlor. The formula in subsection (5) apportions the interest paid on these lines. The resulting sum represents the interest paid in respect of income payments made by the settlement to the settlor and that resulting figure is unavailable to set against the undistributed income.
2445.Subsection (6) removes from the computation interest that has been paid to the settlor or spouse of the settlor since tax will already have been borne on that interest and, but for this, double taxation would arise on those sums.
Section 638: Capital sums paid by way of loan or repayment of loan
2446.This section gives the rules that apply where the capital sums in section 633 are loans or repayments of loans. It is based on section 677 of ICTA.
2447.Subsections (1) provides that if a capital loan is repaid no part of it is treated as the settlor’s income under section 633 for any year following the year of repayment.
2448.Subsections (2) and (3) provide that where a second loan is made to the settlor after repayment of the original loan, that loan is only treated as the settlor’s income to the extent that it exceeds a previous loan which has been treated as the settlor’s income. This is because no repayment of tax is made to the settlor in respect of the repayment of the first loan. He or she has effectively already paid tax on the new amount outstanding.
2449.Subsections (4) and (5) provide that, where a settlor has made a subsequent loan to the settlement following the repayment of an earlier loan, no part of the repayment on the first loan is treated as the settlor’s income after the tax year in which the subsequent loan to the settlement is made, as long as it is not less than the amount of the first loan. The second loan here is treated as a repayment of the capital sum paid out of the settlement as repayment of the first loan.
Section 639: Loans to participators in close companies
2450.This section serves to avoid a double taxation charge as a result of the application of Chapter 6 of Part 4 of this Act. Under that Chapter loans made by a company to a participator and then written off are treated as income net of tax at the dividend ordinary rate on UK distributions. The rule is that where a charge potentially arises under both this section and under Chapter 6 of Part 4 of this Act this section will take precedence, but if a charge under Chapter 6 of Part 4 of this Act has already been made, then the charge under this Chapter on the settlor is reduced by a corresponding amount. See section 418 of this Act (relief where borrowers liable as settlors) which rewrites section 421(3) of ICTA. The section is based on section 677 of ICTA.
Section 640: Grossing-up of deemed income
2451.This section explains the grossing-up procedure for capital sums treated as the settlor’s income and the tax allowed against the settlor’s liability. It is based on section 677 of ICTA.
2452.Subsection (1) provides that the settlor is taxed on the grossed up amount of the capital sum treated as his income. Section 877 of this Act explains how sums are grossed up.
2453.Subsection (2) then allows a set-off of tax against the settlor’s tax liability with the result that only higher rates of tax are chargeable on the settlor. The amount that the settlor may set off against his liability is given in the following subsections.
2454.Subsection (3) explains the amount (“the deductible amount”) that can be set against the settlor’s liability. This is the lesser of the tax at which the capital sum is grossed up at for the tax year (the rate applicable for trusts) or the amount of tax the trustees are deemed to have paid on the available income (irrespective of the fact that the capital sum is grossed up at the rate applicable to trusts for the tax year in which the loan is treated as the settlor’s income). This allows for the fact that where available income to cover the capital sum (see section 633(2)) arose in earlier years, that income may have been charged at different rates to those in the tax year in which the capital sum is treated as the settlor’s income.
2455.Subsections (4) to (7) provide that, in order to ascertain the appropriate rates of tax for subsection (3)(c), the capital sum is matched against available income arising in earlier years before later years and the given rates of tax are applied for each tax year in which the available income representing the grossed-up sum arose. This includes a nil rate of tax where the available income would not have been subject to UK tax because the available income arose outside the United Kingdom to a non-UK resident. Subsection (6)(b) reflects the change in the rate applicable to trusts in FA 2004. The net effect of these subsections is that the credit available against the tax charge broadly represents the tax paid on the available income which represents the grossed-up capital sum. The nil rate applies in relation to any income in any tax year which falls within subsection (6)(a)(i) and (ii).
2456.Subsection (5) provides for grossing-up at the appropriate rate, that is to say the rates given in subsection (6), in order to ascertain the tax credit to set against the settlor’s income (the “deductible amount”). This is a separate grossing-up exercise to that in subsection (1), which provides that the charge on the settlor’s income is always on the amount grossed up at the rate applicable to trusts.
Section 641: Capital sum paid to settlor by body connected with settlement
2457.This section provides a variation on the preceding rule. It ensures that capital sums paid by a corporate body connected with the settlement are treated as income of the settlor where the payment of that capital sum can be identified with a payment made to the corporate body by the settlement. Thus payments of capital from the settlement to the settlor but dog-legged through a connected third party will not avoid a tax charge on the settlor. The section is based on section 678 of ICTA.
2458.Under subsections (1) and (2) where a capital sum is paid to the settlor by a body corporate connected with the settlement and an associated payment is made directly or indirectly to that body corporate by the trustees, the capital sum paid by the body corporate is treated, to the extent that it falls within the associated payment, as if it were paid directly by the trustees to the settlor and section 633 applies accordingly.
2459.Where an associated payment is made in the year following the year in which the payment is made by the corporate body to the settlor, the capital sum is treated as the settlor’s income for that tax year and so on, up to the amount covered by the associated payment, for each subsequent year (subsections (4) to (6)).
2460.See the entry in paragraph 135 of Schedule 2 to this Act for the application of this section in respect of payments to the settlor made before 1995-96 by a body corporate connected with the settlement.
Section 642: Exception for certain loans or repayments of loans
2461.This section provides time limits for section 641. Where the capital sum paid to the settlor is repaid within 12 months or loans made to the settlor by a body corporate connected with the settlement are not outstanding for more than 12 months in five years, the capital sum is not treated as the settlor’s income. The section is based on section 678 of ICTA.
Section 643: Interpretation of sections 641 and 642
2462.This section provides definitions of and further information on terms used in sections 641 and 642. It is based on section 678 of ICTA.
2463.Subsection (1) provides the same tests as section 633 in ascertaining whether a capital sum has been paid to a settlor.
2464.Subsection (4) widens the meaning of payments made by or to another body corporate. It enables sections 641 and 642 to apply where the body corporate making the payment to the settlor is a different body corporate to that receiving the payment from the trustees, whether directly or indirectly, but where both bodies corporate are associated.
Section 644: Application to settlements by two or more settlors
2465.This section explains how the provisions of this Chapter apply where there is more than one settlor. It is based on sections 660E and 682A of ICTA.
2466.The Chapter is written in terms of a single settlor and the rules in subsections (2) to (5) allow the property originating from each settlor to be considered in isolation.
Section 645: Property or income originating from settlor
2467.This section explains what is meant by property or income originating from a settlor for the purposes of section 644. It is based on sections 660E and 682A of ICTA.
2468.Subsection (1) rewrites section 660E(5) of ICTA. Section 660E(5) of ICTA provides under paragraph (c) that property originating from a settlor means property that represents property provided by the settlor and other property as, on a just apportionment, represents the property so provided. This is rewritten as “on a just and reasonable apportionment”. See Change 14 in Annex 1.
Section 646: Adjustments between settlor and trustees etc.
2469.This section enables a settlor to recover from the trustees or others tax which has been charged on him or her under sections 624 or 629 as well as requiring him to repay to the trustees any tax repayment which would not have arisen to him or her apart from the charge under these two sections. The section is based on section 660D of ICTA.
2470.Subsection (1) enables the settlor to recover from the trustees, or whoever else has received the settlement income, the tax payable by the settlor as a result of a charge under sections 624 or 629. Since the settlor has not in fact received the income it is considered inequitable that he or she should have to pay the additional tax. The net effect where such a recovery is made is that the trustees or beneficiary of the settlement effectively pay the tax on the income but at the settlor’s highest tax rate.
2471.Subsection (2) enables the settlor to request a certificate of tax paid from the Inland Revenue which is conclusive, under subsection (3), of the facts in it.
2472.Section 660D(1)(b) refers to “an officer of the Board”. Similar references have been replaced in this Act by the term “Inland Revenue” to achieve a more consistent approach. This is not a change in the law since section 878(1) of this Act defines “the Inland Revenue” as “any officer of the Board of Inland Revenue”.
2473.Subsections (4) and (5) require a repayment of tax to the trustees or other persons receiving the settlement income which a person would not have received but for a charge under sections 624 and 629. This is most likely to arise where the income charged on the settlor has had tax deducted at source and a repayment of tax is made to the settlor because there is a surplus of allowances or reliefs to set against that income. The repayment may be apportioned where the settlement income was received by more than one person.
2474.Section 660D(2) of ICTA refers to “a person” obtaining a repayment of income tax. This is rewritten here as “a settlor”. The person referred to can only be the settlor and the use of “person” simply reflects the language of FA 1922, on which that section is based, which refers to the settlor as “a person making a disposition”.
2475.Subsection (8) ensures that a charge on settlement income in respect of settlor-interested settlements and settlements in respect of minor children of the settlor may still be made on the trustees as recipients of the income.
Section 647: Power to obtain information
2476.This section allows the Inland Revenue to require parties to a settlement to provide them with information within a specified time limit. It is based on section 660F of ICTA.
2477.Section 660F refers to “an officer of the Board”. Similar references have been replaced in this Act by the term “Inland Revenue” to achieve a more consistent approach. This is not a change in the law since section 878(1) of this Act defines “the Inland Revenue” as “any officer of the Board of Inland Revenue”.
Section 648: Income arising under a settlement
2478.This section explains what is meant by income arising under a settlement. It is based on section 660G of ICTA.
2479.Subsection (1) includes all income chargeable to tax on a UK resident from sources within or outside the United Kingdom.
2480.Subsections (2) to (5) apply where the settlor is either not resident in the United Kingdom or not domiciled or not ordinarily resident here. In that case any foreign source income is excluded unless it is remitted to the United Kingdom and the settlor would be chargeable to tax in respect of it if it were his own income. In that case it is included in the income arising under a settlement in the year of remittance.
2481.The net effect of this section is to include all UK source income within income arising under a settlement but to exclude foreign source income if the settlor is non-UK resident. If the settlor would have been charged on an amount calculated by reference to section 832 (relevant foreign income charged on the remittance basis) had he or she been entitled to the income, then that foreign source income is charged only to the extent that it is remitted here.
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