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HMRC internal manual

Inheritance Tax Manual

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HM Revenue & Customs
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Definition of a settlement: the statutory definition

A simple example of a settlement is where a person:

  • gives property to trustees
  • to hold it for a beneficiary for life (the life tenant) and
  • on the death of the life tenant, to give the property to
  • the children of the life tenant absolutely.

The statutory definition of a settlement in IHTA84/S43 (2) is that a settlement means any disposition or dispositions whether it is created: -

  • by an instrument or a formal document,
  • verbally (known as parol or oral)
  • by the operation of law, for example, under an intestacy, or
  • partly by one of these ways and partly another
  • where the property is held on trust:-
  • for persons in succession (for example, life tenant then remainderman),
  • for any persons subject to a contingency (for example , for a beneficiary on attaining age 30 absolutely) Here the contingency is that the beneficiary will not take absolutely if they do not live to be 30
  • by trustees to accumulate any income of the property, or with power to make payments out of income at the discretion of the trustees ( this would be a discretionary trust which falls within the category of non-interest in possession settlements)
  • charged with the payment of an annuity (a defined sum of money payable out of the trust income to the beneficiary The existence of even a small annuity, for example £200 per year, brings the whole fund within the definition of settled property.

Property in a foreign settlement is dealt with under the last paragraph of IHTA/S43 (2).  

S43(2) uses the plural word ‘dispositions’ so ‘settlement’ includes cases where the trust is created by more than one document, deed or action.

Even if the property does not come within the categories above there are circumstances where a settlement is deemed to have been created. These are:

  • Where a lease for life is created (IHTM16191).
  • If the property would have come within the categories above if the disposition been regulated by any part of the law of the UK or (if the property is governed under foreign law) by provisions which are the foreign equivalent of those that would apply. You should refer this type of situation to Technical.

There are further statutory provisions which apply to the definition of a settlement in Scotland (IHTM16041).