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HMRC internal manual

Trusts, Settlements and Estates Manual

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Settlements legislation: settlement for unmarried minor child: settlements legislation

ITTOIA/S629

ITTOIA/S624 applies to arrangements where the settlor, or their spouse or civil partner, retains an interest in the settlement. ITTOIA/S629 applies to situations where income not caught by ITTOIA/S624 is paid, or made available to, or belongs to a minor child or step child of the settlor (who is neither married nor in a civil partnership). A step child includes the child of a civil partner.

Where ITTOIA/S629 applies, the income is deemed to be that of the parent for tax purposes, and is not treated as the child’s.

The following guidance shows how ITTOIA/S629 applies to non-trust arrangements and trusts.

Non-Trust Settlements

Direct gift of shares to minor children

Mr and Mrs X each own 50 of the 100 issued ordinary shares in X Ltd. They each decide to give 10 shares to each of their children aged 12 and 15. The children each then hold 20 shares, 10 from each parent. We would treat the dividends paid to the children as the income of their parents.

Indirect gift of shares from parent

Mr J owns 60 of the 100 issued £1 shares in J Limited. Mr J is the sole company director and is the person responsible for making all the company’s profits because of his knowledge, expertise and hard work. On starting up the company, Mr J allowed his mother to subscribe £40 for 40% of the shares but shortly afterwards she gifted them to her grandchildren. The circumstances are such that the decision to issue 40 shares at par is a bounteous arrangement (as were the shares in Jones v Garnett). The true settlor here is Mr J rather than the children’s grandmother. ITTOIA/S629 therefore applies and attributes the dividends received by the children to Mr J for tax purposes.

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Trusts

This guidance reflects the position for income arising to settlements made on or after 9 March 1999 where the settlor is a parent. It applies also to income arising from additions to pre-existing settlements made on or after 9 March 1999. For income arising from property settled before 9 March 1999 see TSEM4305.

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Bare Trusts

ITTOIA/S629 applies to treat the income belonging to the child as that of the parent for tax purposes whether or not it is paid to the child.

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IIP Trusts

The income arising to an interest in possession trust of which the child is a life tenant is treated as that of the parent for tax purposes.

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Accumulation/Discretionary Trusts

The income of such trusts does not belong to the child until a discretionary payment is made to, or funds are applied for the benefit of the child.

Payments out of current income, accumulated or retained income or capital (to the extent that there is sufficient retained or accumulated income to match them) made to or for the benefit of a minor child of the settlor (who is neither married nor in a civil partnership) are treated as the parent’s for income tax purposes.

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Example 14 - bare trust for a minor child

A parent creates a bare trust (see TSEM1563) for a minor unmarried child on 1 January 2008. No payments are made out, and the trustees retain all the income which exceeds £100.

Although no income is paid to or for the benefit of the child ITTOIA/S629 applies to treat the income as that of the parent because the income belongs to the child.

For settlements made before 9 March 1999, see TSEM4305.

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Example 15

A parent creates an IIP trust of which three children are life tenants. Two of three children are minors. ITTOIA/S629 applies to treat the income of the two minor children as that of the parent because the income belongs to the minor children.

For settlements made before 9 March 1999, see TSEM4305.

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Example 16 - gift of shares to a discretionary trust of which minor child is a beneficiary

A director owns all the shares in a family company. He sets up a discretionary trust for his 10 year old daughter and transfers 25% of this shareholding to the trustees. The trustees make a discretionary payment out of income to the child. ITTOIA/S629 applies to treat the payment from the trust to the child as the income of the parent.