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HMRC internal manual

Trusts, Settlements and Estates Manual

Settlements legislation: summary - additional examples where settlements legislation does not apply

In most everyday situations involving gifts, dividends, shares, partnerships, etc. the settlements legislation will not apply. If there is no “bounty” or if the gift to a spouse or civil partner is an outright gift which is not wholly, or substantially, a right to income, then the legislation will not apply.

Example 20 - outright gift to a spouse

Mrs L owns 10,000 ordinary shares in a FTSE 100 company. Those shares are worth £40,000. Mrs L gives those shares to her husband. Mr L is now entitled to all the dividends from the shares and can sell the shares if he wants and keep the proceeds. This is an outright gift of shares that are not wholly, or substantially, a right to income since they have a capital value and can be traded, so the settlements legislation does not apply.

Example 21 - subscribed shares

Mr M is the sole director and owns all the 100 ordinary shares in M Limited, a small manufacturing company. The company employs 10 people and owns a small factory, a high street shop, tools fixtures and fittings, and three delivery vehicles. Mr M draws a salary of £30,000 each year and receives dividends of £20,000. Mr M then gifts 50 shares to his wife who plays no part in the business. Mr and Mrs M then each receive dividends of £10,000.

We would not seek to apply the settlements legislation to the dividends received by Mrs M. This is because the outright gift of the shares cannot be regarded as wholly or substantially a right to income. The shares have capital rights and the company has substantial assets so on the winding up or sale of the business the shares would have more than an insubstantial value.

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Example 22 - subscribed shares

T Ltd was incorporated in October 1997 to provide a consultancy service to the health sector. Mr T is an IT specialist with a number of years experience in the health sector and Mrs T is an ex-nurse who specialises in producing computer-based learning materials for hospitals. The company’s share capital is £10,000 consisting of £10,000 £1 shares. Mr and Mrs T are both full-time working directors of the company. From the beginning each subscribed for £5,000 shares. The first year’s accounts show that each director received remuneration of £30,000 and that profits available for distribution were £50,000. £30,000 profits are retained in the company to build up the business. A dividend of £2 per share is declared and paid - each shareholder receiving £10,000.

There is no bounty here and no arrangement to which the settlement legislation can apply.

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Example 23 - gifted shares

Mr W and Mr X are founder shareholders and directors of a successful hardware shop run through a company called DIY Ltd. The company was set up to acquire the partnership trade carried on by the two shareholders. At the time there was a single shop, the trade plus assets were worth about £50,000 which were transferred to the company and the company issued 10,000 £1 shares to the partners in return. Over the years the company has grown. It now owns a chain of 8 DIY stores. Some premises are owned and others rented. The company owns a number of delivery vans and employs 50 staff. The shares have increased in value from £5 per share to £75 per share. Mr W and Mr X respectively gift some of their shares to their wives. Mrs W & Mrs X are given 2000 shares each. Dividends are paid on all shares.

Although this is a bounteous transaction it is an outright gift that is not substantially a right to income, because the company has significant capital assets, and is therefore excluded from the definition of settlement by ITTOIA/S626