CG38460 | What is a qualifying settlement - protected settlements

TCGA92/Sch5/para9(10A) to (10D)

A protected settlement is

• a settlement created before 19 March 1991

in which the only beneficiaries are:

• children of the settlor their spouse or civil partner who under 18 years at the beginning of tax year

• unborn children of the settlor their spouse or civil partner or future spouse or civil partner and any future spouse or civil partner of those children

• a future spouse or civil partner of the settlor

• persons who are not defined persons, see CG38470, in relation to the settlor.

A beneficiary is a person who receives or may receive a benefit from the settlement, paragraph 9(10C). It is the same definition that paragraph 2(1) uses to determine whether the settlor has an interest in the settlement, see CG38465.

In strictness the references to the settlor’s children would not include their grandchildren. So a settlement for the benefit of the settlor’s minor children and their grandchildren would not be a protected settlement. In practice HMRC do not treat the settlor’s, or their spouse’s, grandchildren of any age as causing the settlement to fall outside the definition of protected settlement. HMRC published this view in Tax Bulletin 38 page 620.

Tainting

A protected settlement will lose its protection, and come within the scope of section 86, if it is subject to certain changes after 6 April 1999. This is commonly called tainting. It would be unusual for a protected settlement to allow itself to become tainted. See CG38520 for guidance on tainting.

Background

When FA 1998 extended the scope of section 86 so that it applied to all settlements there was a transitional period of a year before the change took effect. This was to allow beneficiaries of pre-19 March 1991 settlements to disclaim their interest so that section 86 would not apply.

If the beneficiaries were minors or unborn children this would require the permission of the court which would be impractical and expensive. Also the need to exclude spouses as potential beneficiaries could cause difficulty if the settlor was unmarried. To avoid these difficulties a separate class of ‘protected settlement’ was introduced to protect settlements for these beneficiaries from the FA 1998 changes. A protected settlement cannot be created after 6 April 1999 but if a protected settlement does become tainted it will lose its protection.