Income Tax (Trading and Other Income) Act 2005 section 640

Grossing-up of deemed income

Section 640 explains how capital sums treated as a settlor's income under the settlement rules are grossed up for tax purposes, and how a tax credit is calculated to set off against the settlor's resulting tax liability.

• Capital sums treated as a settlor's income are grossed up at the trust rate for the relevant tax year, and the settlor is taxed on this grossed-up amount
• A deductible amount — the lowest of three specified calculations — may be set off against the settlor's tax liability, so that in practice only higher-rate tax falls on the settlor
• The deductible amount depends on the trust rate tax on the deemed income, the actual tax charged, and the tax the trustees are deemed to have paid on the matching available income, with the smallest figure used
• Where available income arose in earlier years, it is matched on a first-in-first-out basis, and the grossing-up rate applied reflects the trust rate for the year in which each tranche of income actually arose, including a nil rate for non-UK source income of non-UK resident trustees

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