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Finance Act 2012

Section 12: Settlements: Income Originating from Settlors Other Than Individuals


1.Section 12 provides for amendments to certain provisions of the settlements legislation (Part 5, Chapter 5 Income Tax (Trading and Other Income) Act 2005 (ITTOIA)) so that the rule in section 624(1) does not apply if a settlor is not an individual. The changes will confirm that income which arises under a settlement and originates from any settlor who is not an individual is not treated as that of the settlor.

2.The change will take effect from 21 March 2012.

Details of the Section

3.Paragraph 1 of the section provides for amendments to ITTOIA 2005.

4.Paragraph 2 inserts a new subsection (4) in section 627 of ITTOIA which gives exceptions from the rule in section 624(1) of ITTOIA for certain types of income. The rule in section 624(1) states that income which arises under a settlement is treated for income tax purposes as only that of the settlor if it arises during the settlor’s life and from property in which the settlor has an interest. The new sub section (4) provides that the rule in section 624(1) does not apply to income arising from a settlement, as defined in section 620(1), which originates from any settlor who was not an individual. The effect of the amendment is that income from a settlement in which the settlor has an interest is not treated as income of the settlor for tax purposes if the settlor was not an individual.

5.Paragraph 3 amends section 645(2) of ITTOIA so that it refers to section 627 as well as to section 644. Where there is more than one settlor, section 644 provides that the settlements legislation has effect as if each settlor were the only one. It then provides that property comprised in, and income arising under, a settlement should be taken to refer to property and income originating from that settlor. The amendment to section 645 ensures that ‘income originating from the settlor’ has the same meaning in section 627 as it does in section 644.

6.Paragraph 4 gives the commencement provisions. The amendments made by this section have effect on any income arising from the settlement on or after 21 March 2012.

Background Note

7.The settlements legislation (Part 5, Chapter 5 ITTOIA 2005) applies in situations including those where a settlor, within the meaning of the legislation, has retained an interest in property or income from it. The aim of the provisions is, broadly, to prevent an individual gaining a tax advantage by diverting their income to another person who is liable to income tax at a lower rate than the individual.

8.Where the settlements legislation applies, the income arising under the settlement is treated as income of the settlor. Income tax is charged on the income as if it had arisen directly to the settlor and as if it was the highest part of the settlor’s total income.

9.The purpose of the amendments to the settlements legislation is to confirm that income arising under a settlement is treated as that of the settlor only where the settlor is an individual. The proposed changes would close avoidance schemes that seek to exploit the settlements legislation by using corporate settlors of ‘interest in possession’ settlor-interested trusts to try to avoid income tax at higher or additional rates which would otherwise be due on dividends paid by a subsidiary of the corporate settlor. The amendments would ensure that the relevant provisions do not apply to settlors who are not individuals and hence that the income would not be treated as that of the settlor in those situations.

10.Where the settlements legislation does not apply to an interest in possession trust, the income arising under the settlement will be taxed on the income beneficiaries of the trust.

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