Commentary on Sections Structure of Chapters Overview Section 638: Capital sums paid by way of loan or repayment of loan
2446.This section gives the rules that apply where the capital sums in section 633 are loans or repayments of loans. It is based on section 677 of ICTA.
2447.Subsections (1) provides that if a capital loan is repaid no part of it is treated as the settlor’s income under section 633 for any year following the year of repayment.
2448.Subsections (2) and (3) provide that where a second loan is made to the settlor after repayment of the original loan, that loan is only treated as the settlor’s income to the extent that it exceeds a previous loan which has been treated as the settlor’s income. This is because no repayment of tax is made to the settlor in respect of the repayment of the first loan. He or she has effectively already paid tax on the new amount outstanding.
2449.Subsections (4) and (5) provide that, where a settlor has made a subsequent loan to the settlement following the repayment of an earlier loan, no part of the repayment on the first loan is treated as the settlor’s income after the tax year in which the subsequent loan to the settlement is made, as long as it is not less than the amount of the first loan. The second loan here is treated as a repayment of the capital sum paid out of the settlement as repayment of the first loan.