TSEM1017 - Introduction to trusts: definition of ‘settlor’

Finance Act 2006 introduced a common definition of settlor for both income tax (ICTA88/S685B) and CGT (TCGA92/S68A). The measures came into effect on 6 April 2006 but apply to settlements whenever they were created. ICTA88/S685B was rewritten as ITA/S467.

The definition in ITA/S467 applies for general income tax purposes (see CG33240+ for the corresponding CGT application). It does not apply to the ‘settlements legislation’, which prevents trusts and settlements being used to gain tax advantages (see TSEM4000+). The settlements legislation has its own albeit similar definition of settlor at ITTOIA/S620.

A person is a settlor in relation to a settlement if the settlement was made by that person. A person has made a settlement in any of the following situations:

• he or she has made or entered into it (either directly or indirectly)
• he or she has provided property or undertaken to provide property for a settlement (either directly or indirectly),
• the settlement arose on his or her death and, immediately before the death, that person was competent to dispose of the property which has been settled,
• he or she has made a reciprocal arrangement with any other person for that other person to make or enter into a settlement.

This means that a person creating a settlement or adding to an existing settlement is a settlor in relation to the property so settled. Where the settlement arises on someone’s death, for example a will trust, then the deceased person is the settlor of the property as long as it is property that the person was able to dispose of immediately before he or she died. This does not have to be exactly the same property as long as it is derived from such property. The reciprocal arrangement covers the situation where, for example, a person settles property for the benefit of his sister’s children and the sister settles property for the benefit of his children. In this case the person is treated as the settlor in relation to the settlement for his own children and the sister is treated as the settlor in relation to the settlement for her children.

A person ceases to be a settlor if all of the following circumstances apply:

• there is no longer any property, of which he or she is the settlor, in the settlement and
• he or she has not undertaken to provide any property in the future, and
• he or she has not made reciprocal arrangements with another person to provide property

Identifying the settlor where property is transferred between settlements or there is a variation of a will or intestacy

There are statutory rules for identifying who the settlor is in these circumstances:

ITA/Sections 470 and 471 apply for income tax purposes when property is transferred between settlements for less than full consideration. The corresponding CGT provision is TCGA92/S68B. More detailed guidance can be found at CG33247

ITA/Sections 472 and 473 apply for income tax purposes where there has been a variation of a will or intestacy. The corresponding CGT provision is TCGA92/S68C. There is more detailed guidance at CG33248 and CG37886+.