TSEM4355 - Settlements legislation: summary - additional examples where Settlements legislation does not apply
In most everyday situations involving gifts, dividends,
shares, partnerships, etc. the Settlements legislation will not
apply. If there is no “bounty” or if the gift to a
spouse or civil partner is an outright gift which is not wholly, or
substantially, a right to income, then the legislation will not
apply.
Example 20 – outright gift to a spouse
Mrs L owns 10,000 ordinary shares in a FTSE 100 company. Those shares are worth £40,000. Mrs L gives those shares to her husband. Mr L is now entitled to all the dividends from the shares and can sell the shares if he wants and keep the proceeds. This is an outright gift of shares that are not wholly, or substantially, a right to income since they have a capital value and can be traded, so the Settlements legislation does not apply.
Example 21 – subscribed shares
Mr M is the sole director and owns all the 100 ordinary shares
in M Limited, a small manufacturing company. The company employs 10
people and owns a small factory, a high street shop, tools fixtures
and fittings, and three delivery vehicles. Mr M draws a salary of
£30,000 each year and receives dividends of £20,000. Mr M
then gifts 50 shares to his wife who plays no part in the business.
Mr and Mrs M then each receive dividends of £10,000.
We would not seek to apply the Settlements legislation to the
dividends received by Mrs M. This is because the outright gift of
the shares cannot be regarded as wholly or substantially a right to
income. The shares have capital rights and the company has
substantial assets so on the winding up or sale of the business the
shares would have more than an insubstantial value.
Example 22 – subscribed shares
T Ltd was incorporated in October 1997 to provide a consultancy
service to the health sector. Mr T is an IT specialist with a
number of years experience in the health sector and Mrs T is an
ex-nurse who specialises in producing computer based learning
materials for hospitals. The company’s share capital is
£10.000 consisting of £10,000 £1 shares. Mr and Mrs
T are both full time working directors of the company. From the
beginning each subscribed for £5,000 shares. The first
year’s accounts show that each director received remuneration
of £30,000 and that profits available for distribution were
£50,000. £30,000 profits are retained in the company to
build up the business. A dividend of £2 per share is declared
and paid – each shareholder receiving £10,000.
There is no bounty here and no arrangement to which the
Settlement legislation can apply.
Example 23 – subscribed shares
T Ltd was incorporated in October 1997 to provide a consultancy
service to the health sector. Mr T is an IT specialist with a
number of years experience in the health sector and Mrs T is an
ex-nurse who specialises in producing computer based learning
materials for hospitals. The company's share capital is
£10,000 consisting of £10,000 £1 shares. Mr and Mrs
T are both full time working directors of the company. From the
beginning each subscribed for £5,000 shares. The first
year’s accounts show that each director received remuneration
of £30,000 and that profits available for distribution were
£50,000. £30,000 profits are retained in the company to
build up the business. A dividend of £2 per share is declared
and paid – each shareholder receiving £10,000.
There is no bounty here and no arrangement to which the
Settlement legislation can apply.
Example 24 – gifted shares
Mr W and Mr X are founder shareholders and directors of a
successful hardware shop run through a company called DIY Ltd. The
company was set up to acquire the partnership trade carried on by
the two shareholders. At the time there was a single shop, the
trade plus assets were worth about £50,000 which were
transferred to the company and the company issued 10,000 £1
shares to the partners in return. Over the years the company has
grown. It now owns a chain of 8 DIY stores. Some premises are owned
and others rented. The company owns a number of delivery vans and
employs 50 staff. The shares have increased in value from £5
per share to £75 per share. Mr W and Mr X respectively gift
some of their shares to their wives. Mrs W & Mrs X are given
2000 shares each. Dividends are paid on all shares.
Although this is a bounteous transaction it is an outright
gift that is not substantially a right to income, because the
company has significant capital assets, and is therefore excluded
from the definition of settlement by section 626
