IR27

9 March 1999

SETTLEMENTS AND TRUSTS FOR CHILDREN

In order to promote fairness the existing anti-avoidance settlements
legislation is being strengthened to prevent parents avoiding tax by
transferring their assets to their minor children.

DETAILS

1. The settlements legislation ensures that returns on investments
(such as interest or dividends) made by parents on behalf of their
minor children are generally taxed as the income of the parents
(subject to #100 limit for small amounts of income). This stops
parents avoiding tax by investing their money in their child's name.

2. It was possible for a parent to avoid the settlements legislation,
in section 660B of Part XV of the Income and Corporation Taxes Act
1988, by creating a trust for their minor child in which the child
has an indefeasibly vested interest in the income and capital of the
trust. Such a trust is treated as a bare trust for tax purposes. Any
income arising to the trust which was not distributed was treated as
the child's even if the funds in the trust came from the parent.

3. The Government is concerned about the increasing use of savings
schemes, principally designed by the financial industry, which
incorporated these bare trusts and has decided to act. Therefore with
effect from Budget Day such new trust arrangements will cease to be
effective and income arising will be taxed as that of the parent,
subject to the #100 limit.

4. The changes will also apply to any income arising to funds added
on or after Budget day to existing trusts. Such income will be taxed
as the income of the parent, again subject to the #100 limit.

5. A loophole in the settlements legislation is also being closed
with effect from Budget day. This loophole was inadvertently added
when the legislation was simplified in 1995 and allowed income
accumulated within the trust, which had been treated as the income of
a minor child, to be removed from the trust without triggering a tax
charge. This loophole is being closed in respect of payments made on
or after Budget day.

NOTES FOR EDITORS

1. The anti-avoidance settlements legislation is in Chapter 1A of
Part XV (Sections 660A to 660G) of the Income and Corporation Taxes
Act 1988. Settlements, such as dispositions, trusts, covenants,
agreements, arrangements or a transfer of assets are sometimes used
by people to avoid tax and this legislation exists to deter that. The
rules operate by treating any income arising under a settlement as
the income of the settlor (the person who funded the settlement) for
tax purposes.

2. These changes are a revenue protection measure. It is anticipated
that they will prevent a future loss of tax of about #50 million
pounds a year.

3. Parents affected by these changes will need to include the taxable
income on their self assessment return. If they are not sent a return
they will need to notify their Tax Office. A revised version of the
self assessment helpsheet (IR270) will be available soon explaining
the changes. 

INLAND REVENUE PRESS OFFICE
Media enquiries to: 0171 438 6692/6706/7327/7356
(Out of hours: 0860 359544)

Non-media enquiries to:  0171 438 6420/6425
(Out of hours: 0860 359544)

Non-media enquiries to:  0171 438 6420/6425
(Office hours only)

Inland Revenue information is on the Internet:
www.inlandrevenue.gov.uk

# = pounds sterling