Income shifting

Produced by Tolley

The following Personal Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Income shifting
  • Settlement provisions
  • What is a settlement?
  • How could the settlements legislation apply to businesses?
  • Exceptions to the income tax charge on the settlor
  • Outright gifts between spouses / civil partners
  • Certain types of income
  • Exception for gifts to charities
  • Where are we now?

Income shifting

A popular tax planning point is to transfer income-producing assets between spouses or civil partners where one pays income tax at a lower marginal rate than the other, or to ensure that personal allowances are used in full (also known as ‘income splitting’ or ‘income shifting’). The scope for tax saving is potentially greater with the introduction of the additional tax rate from 6 April 2010.

For capital gains tax purposes the transfer of income-producing assets should be a no-gain no-loss transfer, see the Inter-spouse transfer guidance note. Care needs to be taken to avoid the transfer constituting a settlement, and the income being taxed on the donor despite the transfer (see below).

The advantages of income splitting are discussed further in the Utilising allowances and lower rate bands guidance note.

Settlement provisions

The settlement provisions were originally introduced to prevent the settlor of a trust gaining a tax advantage in situations where he (or his spouse / civil partner) could benefit from a trust. If a settlor or his spouse / civil partner can benefit from a settlement, any income arising in the settlement will be taxed on the settlor even if he did not receive it.

Similarly, where a minor child receives gross income of over £100 in the tax year which relates to the gift of an income-producing asset from his parent, the income is assessed on the parent (as the ‘settlor’) instead of the child. This does not apply to income from child trust funds or junior ISAs. This is discussed further in the Interest received net or gross guidance note.

In recent years, HMRC has sought to extend the settlements anti-avoidance legislation to business situations.

HMRC guidance in this area is included in Tax Bulletin 64, published in April 2003. Since this pre-dates the enactment of ITTOIA 2005, the statutory references to the anti-avoidance rules are to the former legislation, which was found in ICTA 1988, s 660. HMRC produced further guidance in

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