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HMRC internal manual

Trusts, Settlements and Estates Manual

HM Revenue & Customs
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Settlements legislation: summary - application to non-trust situations

Whether or not the settlements legislation applies to an arrangement depends on the particular facts of the case. It is necessary to look at the arrangement as a whole. If there is a bounteous arrangement which effectively transfers income earned by one person to another resulting in a reduction in overall tax liability the arrangement may be liable to challenge under the settlements legislation.

A purely commercial transaction or series of transactions at arms length is outside the meaning of ‘settlement’. Most commonly the legislation will apply where individuals seek to divert income to members of their family or to friends. A good test of whether or not the legislation could apply is to consider if the same payments would be made to a person who acquired shares in a company or a share of a partnership at arm’s length? If the income is being paid simply because the recipient is the spouse, civil partner or minor child of the settlor then the settlements legislation may apply. The settlements legislation will not apply where the recipient is another individual unless there are arrangements in place whereby the income will be paid or applied for the benefit of the settlor (or spouse etc). It is not possible to provide a definitive list of the issues to look for when deciding which cases to take up for enquiry, but some of the factors to look out for are listed at TSEM4325