If the trust rate income for a tax year of the trustees of a settlement is £1,000 or less, income tax is not charged on it at the dividend trust rate or at the trust rate.

If the trustees' trust rate income is more than £1,000, income tax is not charged on the first £1,000 of it at the dividend trust rate or at the trust rate.

Instead, income tax is charged on the trustees' trust rate income or the first £1,000 of it (as the case may be) at the rate or rates which would apply apart from Chapter 3 (see Chapter 2 of Part 2).

For the purposes of subsection (2) apply the following rules in determining the type or types of income that make up the first £1,000 of the trustees' trust rate income.

Rule 1

If the trustees' trust rate income includes amounts on which income tax would be charged at the basic rate apart from Chapter 3, treat those amounts as the lowest part of the trust rate income.

Rule 2

If the trustees' trust rate income includes amounts on which income tax would be charged at the dividend ordinary rate apart from Chapter 3, treat those amounts as the highest part of the trust rate income.

For the purposes of this section gains chargeable under Chapter 9 of Part 4 of ITTOIA 2005 (gains from contracts for life assurance etc) are treated as if they were savings income.

Amounts on which income tax is not to be charged at the dividend trust rate or at the trust rate as a result of Chapter 4 are excluded from the trustees' trust rate income for the purposes of this section.

The application of section 491 in relation to the trustees of a settlement (“the relevant settlement”) for a tax year is modified in accordance with subsection (2) if the settlor in relation to the relevant settlement has made one or more other current settlements.

The settlor's threshold amount is the amount calculated by dividing £1,000 by the number of current settlements (including the relevant settlement) made by the settlor.

A settlement is current if it is in existence at a time during the tax year.