Trust Declaration for sole owned property and Settlements Legislation

Trust Declaration for sole owned property and Settlements Legislation

Settlor

A settlor is a person who ‘makes a settlement’, that’s someone who puts or gifts money or other assets into a settlement. This is known as ‘settling’ property and it can be done directly or indirectly, (HMRC Help Sheet HS270)

A settlement

For Income Tax purposes, 2 elements must be present for there to be a settlement:

  1. There has to be some form of arrangement, either formal or informal, where property or income belonging to one person is passed to another – property here includes money, land and other types of physical assets as well as other assets such as shares, rights and options
  2. There must be an element of giving or getting something for nothing or for less than the open market value – this is known as bounty

Settlements may involve written agreements or deeds. Trusts are a common type, but a settlement can also be a disposition, covenant or agreement. However, there does not have to be a deed and so settlements can also include an unwritten arrangement or even a straightforward gift or transfer of property. (HMRC Help Sheet HS270)

What is not treated as a settlement

There are a number of transactions or arrangements which are not treated as settlements. e.g.

  • outright gifts between spouses or civil partners, but only if the person receiving the gift is entitled to all the income that arises on it and what they’re receiving is not just income (or mostly income)

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 settlor’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. (HMRC ITTOIA/S626)

Comments from Tax Landlord Ltd

Definition of income – money received on a regular basis for work or through investments (English Dictionary)

It is considered that the first section of HMRC ITTOIA/S626 is badly worded by HMRC and can actually be considered as below – 

The exceptions to the Settlements Legislation for gifts between spouses will apply providing both the following are complied with –

    1. The gift carries a right to the whole of the income.
    2. The property given is not just wholly or substantially a right to income.

The Trust Declaration agrees beneficial interest but also transfers any capital gain on the property to the beneficiary. A capital gain on the property can be considered a monetary benefit but not classed as income.

The following comments are provided by Tax Landlord Ltd based on the interpretation of the HMRC Manuals of Guidance which are not Statutes of Law and are subject to HMRC’s interpretation which can vary based on Government Legislation and legal challenge.

Consequently, Tax Landlord Ltd cannot be held liable for any challenge by HMRC based on the below comments which are provided solely for the assistance of clients regarding the interpretation of the HMRC Manuals of Guidance.

The Trust Declaration can be considered as an outright gift between spouses and not subject to the Settlements Legislation for the below reasons – 

  1. There is a formal agreement where income from property is passed to another.
  2. There is an element of giving or getting something for nothing.
  3. The person receiving the gift is entitled to all the income that arises on the gift and they are fully entitled to the future capital gain on sale of the property and not just the regular rental income.

 

The above comments are the personal views and interpretation of the HMRC Manual of Guidance.

Paul Sinclair
Director Tax Landlord Ltd

April 2024