TSEM4110 - Settlements legislation: restrictions to the definition of settlement

There are some important statutory exemptions from the legislation:

• Section 626(1) exempts situations where the property passed to a spouse or civil partner is an outright gift, unless;

• the gift does not carry the right to the whole of the income arising, or
• the property given is wholly or substantially a right to income.

• Section 627(2)(a) exempts annual payments made by an individual for bona fide commercial reasons in connection with their trade, profession or vocation.
• Section 627(2)(b) exempts certain donations made to charities.
• Section 627(2)(c) exempts income consisting of a benefit under a relevant pension schemes.

Additionally, a purely commercial transaction at arms length is outside the meaning of ‘settlement’.

Settlement must include an element of bounty, as decided in the tax case of CIR v Plummer (54 TC 1). Bounty is the provision of value without any corresponding quid pro quo, usually a gift or a transfer at less than full value.

Settlement does not include an outright gift by one spouse or civil partner to another unless the gift does not carry a right to the whole of the income or the property given is wholly or substantially a right to income (see TSEM4205).

For the purposes of the Settlements legislation, ‘trust’ does not include a trust set up under a Will or intestacy.

The Settlements legislation can apply to deeds of variation or family arrangement (TSEM1815).

Tax case

CIR v Plummer 54 TC 1