TSEM4205 - Settlements legislation: settlor retains an interest - exceptions - outright gifts between spouses or civil partners
ITTOIA/S626
The rule that where the settlor has retained an interest in property in a settlement the income arising is treated as the settlor바카라 사이트™s income for all tax purposes (TSEM4200) does not apply to an outright gift by one spouse or civil partner to another unless
- the gift does not carry a right to the whole of the income or
- the property given is wholly or substantially a right to income.
A gift is not an outright gift if
- it is subject to conditions, or
- there are any circumstances in which the property, or any related property
- is payable to the giver
- is applicable for the benefit of the giver, or
- will, or may become, so payable or applicable.
Example 4 - outright gift
X owns a property that is let at a commercial rent to an unconnected third party. X transfers the property by outright gift to his spouse Y who then receives the rents. X has no further interest in or rights over the property. The rents that Y receives are not subject to the settlements legislation. They are Y바카라 사이트™s income for tax purposes.
Example 4a - no outright gift
The facts are as in example 4 but the gift is subject to an agreement under which X can require his spouse to return the property to him at a future date. This is a gift with conditions and there are circumstances in which the gifted property may return to the giver so it is not an outright gift. The rents that Y receives are subject to the settlements legislation. They are X바카라 사이트™s income for tax purposes.
Example 5 - outright gift wholly or substantially a right to income
An engineering company has 100 ordinary £1 shares. Mr P and Mr O own 50 ordinary shares each. They create a new class of B shares which carry no voting rights and no assets in a winding up. They then issue 50 B shares to each of their wives. Dividends voted on those B shares would be treated as the income of Mr P and Mr O rather than their wives as the B dividends are from shares that are wholly or substantially a right to income and so not exempted from ITTOIA/S624 by ITTOIAS626. (This example is based on the High Court case of Young v Pearce; Young v Scrutton (1996) STC 743).
Example 6 outright gift not wholly or substantially a right to income
X is an IT consultant. He owns all the shares in a private company through which he sells his services. The company receives all the income he generates. The company바카라 사이트™s only source of income is from work carried out by X. It has insignificant capital assets. X transfers his shares in the company to his wife by way of gift. His work in one year earns the company more than £70,000 but he decides to draw only £40,000 salary. This leaves £30,000 profit for the company. The company then pays a dividend of £30,000 to Mrs X. The arrangement effectively transfers part of X바카라 사이트™s earnings to his wife. However, the House of Lords judgment in the case of Jones v Garnett confirmed that the focus of ITTOIA/S626 was the settled property. Regardless of the underlying arrangement the transfer of shares is an outright gift between spouses. Unlike the shares in example 5 above, the property gifted here is a holding of ordinary shares with rights to capital. The gift is not therefore of property which is wholly or substantially a right to income. The settlements legislation does not apply and we would not treat the dividend as the income of X.