Overview of the settlement provisions

A popular tax planning approach is to transfer income-producing assets between spouses or civil partners. This may be done where one pays income tax at a lower marginal rate than the other, or to ensure that personal allowances are used in full. Such arrangements are also known as ‘income splitting’ or ‘income shifting’. They have long been the subject of HMRC scrutiny.

Inter-spousal / civil partner tax planning is assisted by the fact that, for capital gains tax purposes, transfers of assets between spouses or civil partners who are living together are generally treated as taking place on a no-gain no-loss basis. Special provisions apply following separation or divorce. See the Inter-spouse transfer guidance note.

One aspect which has come under the spotlight is that such transfers may constitute a settlement. The settlement rules, as discussed below, are complex but they can result in income being taxed on the donor despite the transfer (see