What is Settlements Legislation (Income Tax)?

Full Definition

The settlements legislation is a long-standing set of Income Tax anti-avoidance rules (contained in Chapter 5, Part 5 of ITTOIA 2005) that can redirect income arising under a 'settlement' back to the person who made the settlement (the settlor) for tax purposes, where they or their spouse retain an interest. It is best known for the 2007 House of Lords case Jones v Garnett (widely referred to as 'Arctic Systems'), which considered whether a husband who gave his wife ordinary shares in their jointly-run limited company, allowing dividend income to be split between them for tax efficiency, had made a 'settlement' that should be taxed on him alone. HMRC lost the case because the shares given were ordinary shares carrying full rights (not just a right to income), which fell within a specific exemption for outright gifts between spouses. The case did not end HMRC's use of the settlements legislation more broadly -- arrangements involving non-ordinary shares, waivers of dividends in favour of a spouse or connected minor children, or artificial income-shifting structures without a genuine outright gift of the underlying asset remain vulnerable to challenge under these rules.

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