The settlement legislation aims to ensure that if a settlor retains an interest in property within a settlement, the income arising treats it as the settlor’s income for all tax purposes. A settlor can be said to have retained an interest if the property or income may be applied for the benefit of the settlor, a spouse or civil partner. Generally, the settlements legislation can apply when an individual arranges to divert income to someone else, whilst also saving tax.
However, in most everyday situations involving gifts, dividends, shares, partnerships etc., the settlements legislation will not apply. For example, if there is no “bounty” or if the gift to a spouse or civil partner is an outright gift which is not wholly, or substantially, a right to income.
HMRC’s manuals provide the following two indicative examples of how the legislation applies to non-trust settlements.
Direct gift of shares to minor children
Mr and Mrs X each own 50 of the 100 issued ordinary shares in X Ltd. They each decide to give 10 shares to each of their children aged 12 and 15. The children each then hold 20 shares, 10 from each parent. We would treat the dividends paid to the children as the income of their parents.
Indirect gift of shares from parent
Mr J owns 60 of the 100 issued £1 shares in J Limited. Mr J is the company director and is responsible for making the company’s profits because of his knowledge and expertise. On starting up the company, Mr J allowed his mother to subscribe £40 for 40% of the shares. However, shortly afterwards she gifted them to her grandchildren. The circumstances are such that the decision to issue 40 shares at par is a bounteous arrangement (as were the shares in Jones v Garnett). The true settlor here is Mr J rather than the children’s grandmother. ITTOIA/S629 therefore applies and attributes the dividends received by the children to Mr J for tax purposes.