Introduction to Trusts: legal background - tax law: meaning of settlement and related terms
‘Settlement’ for general Income Tax purposes
The tax legislation in ITA (see TSEM1101) refers to ‘trustees of a settlement’. ‘Settlement’ itself is not defined in ITA. A ‘settlement’ is, broadly, another name for a trust. But the word is not generally used to mean that in Scotland.
For Capital Gains Tax purposes see CG33110.
Note that in certain circumstances ‘settlement’ may mean something much wider than a trust, including an ‘arrangement’. See TSEM4000+ about the ‘settlements legislation’ in ITTOIA, which prevents trusts and other settlements being used to gain Income Tax advantages.
‘Settled property’ for general Income Tax purposes
ITA/S466 provides a definition of settled property for Income Tax purposes which mirrors the CGT definition in TCGA92/S68 (see CG33230+ for the corresponding CGT application).
For Income Tax purposes settled property is any property held in trust by a person unless that person holds it:
- as nominee for another, or
- as bare trustee for another.
‘Settlor’ for general Income Tax purposes
ITA/S467 provides a definition of settlor for Income Tax purposes which mirrors the CGT definition in TCGA92/S68A (see CG33240+ for the corresponding CGT application).
The definition in ITA/S467 is similar to but separate from the definition of settlor in ITTOIA/S620 (the settlements legislation, see TSEM4000+).
In ITA/S467, a person is a settlor in relation to a settlement if the settlement was made by that person. A person has made a settlement in any of the following situations:
- he or she has made or entered into it (either directly or indirectly)
- he or she has provided property or undertaken to provide property for a settlement (either directly or indirectly)
- the settlement arose on his or her death, and, immediately before the death, that person was competent to dispose of the property which has been settled.
- he or she has made a reciprocal arrangement with any other person for that other person to make or enter into a settlement.
This means that a person creating a settlement or adding to an existing settlement is a settlor in relation to the property so settled. Where the settlement arises on someone’s death, for example a will trust, then the deceased person is the settlor of the property as long as it is property that the person was able to dispose of immediately before he or she died. This does not have to be exactly the same property as long as it is derived from such property.
The reciprocal arrangement covers the situation where, for example, a person settles property for the benefit of his sister’s children and the sister settles property for the benefit of his children. In this case the person is treated as the settlor in relation to the settlement for his own children and the sister is treated as the settlor in relation to the settlement for her children.
A person ceases to be a settlor if all of the following circumstances apply:
- there is no longer any property, of which he or she is the settlor, in the settlement and
- he or she has not undertaken to provide any property in the future, and
- he or she has not made reciprocal arrangements with another person to provide property.
Identifying the settlor where property is transferred between settlements or there is a variation of a Will or intestacy
When property is transferred between settlements for less than full consideration ITA/Sections 470 and 471 apply for Income Tax purposes. The corresponding CGT provision is TCGA92/S68B. More detailed guidance can be found at CG33247. External customers can find this guidance at http://www.hmrc.gov.uk/manuals/cgmanual/CG33247.htm Where there has been a variation of a Will or intestacy ITA/Sections 472 and 473 apply for Income Tax purposes. The corresponding CGT provision is TCGA92/S68C. There is more detailed guidance at CG33248 and CG37886. External customers can find this guidance at http://www.hmrc.gov.uk/manuals/cgmanual/CG37886.htm