Income Tax (Trading and Other Income) Act 2005 section 638

Capital sums paid by way of loan or repayment of loan

Section 638 sets out the rules that apply when capital sums paid between a settlor and the trustees of a settlement take the form of loans or repayments of loans, and how these interact with the income treatment under section 633.

• Once a settlor fully repays a capital loan received from a settlement, the loan ceases to be treated as the settlor's income from the tax year following the year of repayment onwards.
• Where a settlor receives a new loan after fully repaying an earlier one, only the amount by which the new loan exceeds the sum already taxed as the settlor's income under the earlier loan is treated as income — preventing double taxation on the same amount.
• Where the trustees fully repay a loan originally made by the settlor to the settlement, and the settlor subsequently lends the trustees an amount at least equal to that repayment, the repayment stops being treated as the settlor's income from the tax year the new loan is made onwards.
• These rules ensure that where money flows back and forth between a settlor and the settlement in the form of loans, the income tax charge under section 633 is adjusted to reflect the net economic position rather than taxing gross amounts repeatedly.