640Grossing-up of deemed income
(1)The whole or any part of a capital sum which is treated under section 633 as income of the settlor for any tax year is treated as income of an amount equal to the sum or the part of the sum, grossed up by reference to the rate applicable to trusts for that year.
(2)The deductible amount is to be set off against the amount of tax charged on any amount treated under section 633 as income of the settlor for any year.
(3)In subsection (2) the “deductible amount” is an amount equal to—
(a)tax at the rate applicable to trusts for the year on the amount treated under section 633 as the settlor’s income,
(b)so much of the amount of tax at that rate as is equal to the tax charged, or
(c)the amount of tax paid by the trustees on the grossed-up amount of so much of the amount of income available up to the end of the year, in relation to the capital sum, as is taken into account under section 633 in relation to that sum in that year (see subsections (4) to (7) below),
whichever is the least.
(4)For the purposes of subsection (3)(c)—
(a)any reduction falling to be made under section 635(3)(d) is treated as made against income arising under the settlement in an earlier tax year before income arising under the settlement in a later tax year, and
(b)income arising under the settlement in an earlier tax year is treated as taken into account under section 633 before income arising under the settlement in a later tax year.
(5)For the purposes of subsection (3)(c)—
(a)the grossed-up amount of any sum is an amount equal to the sum, grossed up by reference to the appropriate rate for each part of the sum, and
(b)the amount of tax paid by the trustees on that grossed-up amount is the difference between the grossed-up amount and the sum in question.
(6)For the purposes of subsection (5)—
(a)the appropriate rate for any part of a sum is 0% if—
(i)the income that falls to be treated in accordance with subsection (4) as representing that part of the sum is income from a source outside the United Kingdom, and
(ii)the trustees were non-UK resident for the relevant tax year, and
(b)the appropriate rate for any part of a sum in relation to which paragraph (a) does not apply is—
(i)34%, if the relevant tax year is the year 2003-04 or any earlier tax year, and
(ii)40%, if the relevant tax year is the year 2004-05 or any subsequent tax year.
(7)In subsection (6) “the relevant tax year”, in relation to any part of a sum, means the tax year in which the income treated in accordance with subsection (4) as representing that part of the sum arose under the settlement.