The settlements legislation is designed to ensure that where a settlor retains an interest in settled property, the income arising is treated as the settlor’s income for all tax purposes. A settlor will be treated as having retained an interest where the settlor, or their spouse or civil partner, can benefit from either the income or the underlying property.
In general terms, the settlements legislation may apply where an individual enters into an arrangement which diverts income to another person, resulting in a tax advantage. Such arrangements typically involve an element of “bounty” and are not fully commercial or made at arm’s length.
The legislation is particularly relevant where:
- there is an element of bounty, or
- the arrangement is not on commercial terms, or
- it is not at arm’s length, or
- in the case of a gift between spouses or civil partners, the gift consists wholly or substantially of a right to income.
However, there are a number of everyday scenarios where the settlements legislation will not apply. Following extensive case law in this area, HMRC guidance and judicial decisions indicate that where there is no element of bounty, or where there is an outright gift between spouses or civil partners that is not wholly or substantially a right to income, the legislation will not generally be applied.