Income Tax (Trading and Other Income) Act 2005 section 637

Qualifications to section 636

Section 637 sets out qualifications and restrictions on how certain payments made by trustees — particularly interest payments and payments to connected parties — affect the calculation of undistributed income under section 636 that may be taxed on the settlor.

• Interest paid by trustees and payments to connected companies or other settlements by the same settlor cannot reduce undistributed income under section 636
• Where trustees pay non-deductible interest, special rules prevent that interest from reducing the income taxable on the settlor, using a formula to apportion the interest between payments to the settlor and payments to others
• Interest that qualifies for tax relief, or interest paid to the settlor or their cohabiting spouse or civil partner, is excluded from these restrictions to avoid double taxation
• A body corporate is treated as connected with a settlement if it is a close company whose participators include the settlement trustees, or if it is controlled by such a company