RE2551 - Covenants and capital gifts: other settlements and arrangements

The preceding instructions deal with the most common ways of transferring income from one taxpayer to another. But there are other possibilities. Because the Settlements legislation, is widely drawn, many arrangements and agreements can be regarded as Settlements. That legislation can therefore have the effect of cancelling any tax advantage of such arrangements and agreements. Wherever you see a transaction or a series of transactions not mentioned in the previous instructions that has the effect of transferring income or capital from one person to another, send the case to FICO (Trusts and Settlements).

The only exceptions are

• out and out gifts of capital between adults and
• purely business transactions, where neither person gets something for nothing. Ask an Inspector if you are not sure whether a case falls within this exception or not.

Some examples of cases that Claims Branch (Advisory) should see are

• interest-free loans or loans at significantly less than a commercial rate of interest, where the loaned capital is invested to generate income. Find out the precise terms of the loan and of any agreement to invest the money, particularly whether the loan is for a fixed term or is repayable on demand, before submitting the case
• dividend waivers in connection with family companies, where the effect is to enable the company to pay other shareholders a larger dividend than they would otherwise be able to afford. Paragraph 7 of Technical Notes 35 issued to Inspectors gives further details
• the introduction of a new partner into a partnership on non-commercial terms. For example, where the new partner contributes very little capital into the partnership, is perhaps not liable for losses (or liability for losses is restricted to the small amount of capital introduced) and yet is to receive a significant proportion of profits.

Other examples may occur. Often, the person who receives the income is another member of the family which, from the introduction of independent taxation in 1990-91, could be the wife (or husband) of the transferor. But even if it is not, let Claims Branch (Advisory) see the case. Include as much detail of the transaction as possible when making the submission.