6(1)After section 685 of ITTOIA 2005 insert—U.K.
“685ASettlor-interested settlements
(1)This section applies if—
(a)a person receives an annual payment in respect of income from the trustees of a settlement,
(b)the payment is made in the exercise of a discretion (whether of the trustees of the settlement or any other person), and
(c)a settlor is charged to tax under section 619(1) on the income arising to the trustees of the settlement (whether in the current year of assessment or in a previous year of assessment) out of which the annual payment is made.
(2)This section applies only in respect of that proportion of the annual payment which corresponds to the proportion of the total income arising to the trustees of the settlement in respect of which a settlor is chargeable to tax under section 619(1).
(3)If and in so far as this section applies, the recipient of the annual payment shall be treated for the purposes of this Chapter as having paid income tax at the higher rate in respect of the annual payment.
(4)But—
(a)tax which the recipient is treated by virtue of this section as having paid is not repayable,
(b)tax which the recipient is treated by virtue of this section as having paid may not be taken into account in relation to a tax liability of the recipient in respect of any other income of his, and
(c)the annual payment shall be treated for the purposes of sections 348 and 349(1) of ICTA as payable wholly out of profits or gains not brought into charge to income tax.
(5)If the recipient of the annual payment is a settlor in relation to the settlement, if and in so far as this section applies the annual payment shall not be treated as his income for the purposes of the Income Tax Acts (and subsection (3) does not apply).
(6)Section 687 of ICTA shall not apply in relation to an annual payment if and in so far as this section applies.”
(2)This paragraph shall have effect for payments in respect of income made on or after 6th April 2006.