Capital payment to settlor and trust tax pool

If a settlor of a discretionary trust (which is not settlor interested) receives a capital payment, which is charged as income of the settlor under Section 633 ITTOIA, is the notional tax credit given under Section 640 ITTOIA deducted from the trustees’ tax pool, or is the trustees’ tax pool unaffected by the charge under Section 633?

I am perplexed by this question as the subject would appear to be a breach of trust – distributing capital to a non-beneficiary.

If the distribution is not one the trustees could lawfully make, I do not see how this can affect the tax pool.

Perhaps there is a layer of information missing that would explain why the settlor might be entitled to a capital distribution?

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

Hi Paul,

It was a loan repayment.


The tax pool is unaffected.

ITTOIA 2005 s 624 is not in point if the settlor cannot benefit.

ITTOI 2005 s 633, however, applies to loans made to the settlor (or repayments are made by trustees to the settlor) even if the settlor is excluded from any benefit.

Malcolm Finney

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Please may I ask a related question? in terms of matching the capital payment to undistributed income, how many years back should be considered (I had in mind that undistributed income becomes capital after a couple of years, but perhaps not for these purposes?). Many thanks