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Finance Act 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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