Income Tax (Trading and Other Income) Act 2005 section 685A

Settlor-interested settlements

Section 685A deals with the tax treatment of discretionary annual payments made by trustees of a settlement where the underlying trust income has already been taxed on the settlor.

• Where trustees make a discretionary annual payment out of income that has been charged on the settlor under the settlements legislation, the beneficiary receiving that payment is treated as having paid income tax at the additional rate (or the highest Scottish rate or Welsh additional rate, as appropriate) on the actual amount received
• The rule only applies to the proportion of the annual payment that corresponds to the proportion of total trust income on which the settlor has been charged to tax — if only part of the trust income is taxed on the settlor, only that fraction of the payment is covered
• The deemed tax credit attached to the payment is strictly ring-fenced: it cannot be repaid and cannot be set against the recipient's tax liability on any other income
• If the recipient of the payment is themselves the settlor, the payment is simply excluded from their income altogether, preventing a double charge; for all other recipients, the payment is treated as the highest part of their total income (except for top slicing relief on life insurance gains)

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