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).

A gift is not an outright gift if it is subject to conditions or if it could revert to the donor in any circumstances whatsoever. In any circumstances whatsoever would not include an independent decision by the recipient spouse to return it to the donor.

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