CG38465 | Does the settlor have an interest in the settlement - TCGA92/S86?

TCGA92/S86(1)(d) and TCGA92/Sch5/para2(1)(2)

A settlor has an interest in a settlement for a tax year if at any time in that year

• settlement property or income is or will or may become payable to or be applied for the benefit of a defined person

• a defined person enjoys a direct or indirect benefit from settlement property or income.

The first bullet covers current and potential beneficiaries and persons who may be added as beneficiaries if those beneficiaries are defined persons. See CG38470 for guidance on the definition of defined person.

The second bullet point covers the case in which a defined person enjoys a benefit from the settlement even though they are not a beneficiary of the settlement. Such a payment may be made in breach of trust.

If there is more than one settlor each settlor will have an interest only to the extent that the benefit comes from relevant property or income. Relevant property or income is property or income that originates from them, TCGA92/Sch5/para2(2). See CG38500 for guidance on the meaning of originating.

Pre-17 March 1999 settlements

As explained in CG38455 any settlement whenever it was created is a qualifying settlement unless it is a protected settlement. So a settlement created before 17 March 1999 will be a qualifying settlement if a defined person can continue to benefit from it after 17 March 1999. But section 86 will apply only if the settlor has an interest in the settlement. The tests in TCGA92/S86(1) have to be considered in the year that gains accrue to the trustees. If the defined persons are excluded from the settlement in the year before any gains accrue section 86 will not apply to those gains because the settlor will not have an interest in the settlement. The beneficiaries do not have to be excluded before 17 March 1999. See the example in CG38475.