TSEM4300 - Settlements legislation: settlement for minor child who is neither married nor in a civil partnership

ITTOIA/S629

Section 624 applies to arrangements where the settlor, or their spouse or civil partner, retain an interest in the settlement. Section 629 applies to situations where income not caught by Section 624 is paid or made available to a minor child or step child of the settlor (who is nether married nor in a civil partnership). A step child includes the child of a civil partner. Where section 629 applies, some or all of the income arising is deemed to be that of the parent for tax purposes if payments are made to or for the benefit of the child.

Payments out of current income, accumulated or retained income or capital (to the extent that there is sufficient retained or accumulated income to match them) made to or for the benefit of a minor child of the settlor (who is neither married nor in a civil partnership) are treated as the settlor’s for income tax purposes.

Example 14 – 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.

Example 15 – gift of shares to trust of which minor child is a beneficiary

A director owns all the shares in a family company. He sets up a discretionary trust for his 10-year-old daughter and transfers 25% of his shareholding to the trustees. A dividend is paid and the trustees make a discretionary payment to the child. We would treat the payment from the trust to the child as the income of the parent.

Example 16 – children – indirect gift of shares from parent

Mr J owns all 100 issued £1 shares in J Limited. Mr J is the sole company director and is the person responsible for making all the company's profits because of his knowledge, expertise and hard work. On starting up the company, Mr J allowed his mother to subscribe £40 for 40% of the shares but 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. Section 629 therefore applies and attributes the dividends received by the children to Mr J for tax purposes.