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HMRC internal manual

Trusts, Settlements and Estates Manual

Settlements legislation: settlements - look at the whole arrangement

You may find it necessary to consider the whole arrangement. This could include a series of transactions, some of which may be commercial or involve outright gifts between spouses or civil partners. If the overall effect of the whole arrangement is to transfer income from one individual (the settlor) to

  • the settlor’s spouse or civil partner or
  • minor children or step children of the settlor who are neither married nor in a civil partnership,

the settlements legislation is likely to apply. However, where the beneficiary of the arrangement is a spouse or civil partner you also need to consider whether the exemption for outright gifts applies (see TSEM4205).

Example 7 - subscribed shares

Mr U is a self-employed IT consultant. He reads an advert on a specialist website and as a result he decides to offer his services through a ‘composite’ company set up by another company specialising in taxation services. Under an agreement he will subscribe for a special class of share (a £1 ‘U’ share) which has rights to all his earnings less a ‘commission’ paid to the organisers. The U shares have rights only to that income and repayment at par value. When the agreement is sent to him for signature there is a box to tick if he wants a share issued to anyone else. He ticks the box and asks for an additional share to be issued to Mrs U. Apart from subscribing £1 for the share, Mrs U takes no part in the business. During year one his efforts contribute income of £68,000 to the company. The company retains sufficient to cover expenses and tax and the balance remaining of £54,000 is paid to Mr and Mrs U as dividends who each receive £27,000.

This is a bounteous transaction caught by the settlements legislation. As the property given is wholly or substantially a right to income the exemption for outright gifts to spouses and civil partners does not apply.

On 6 April 2007 ITEPA/Part2, Chapter9, more commonly known as the Managed Service Company Legislation, was introduced. Since that date ‘composite’ companies which meet the statutory definition of a Managed Service Company must treat all payments or benefits made to a worker (Mr U), or an associate (Mrs U in the above example) as earnings from employment of the worker (Mr U). Where Chapter 9 applies, and all of the income is treated as employment income of the worker, there is no need to consider the settlements Legislation.

HMRC Internal guidance: Managed Service Companies

HMRC External guidance: HM Revenue & Customs: Managed Service Companies