Spousal shareholding and the income tax settlement rules

It is well known that, under s624 Income Tax (Trading and Other Income) Act 2005, the incomes of a ‘settlement’ is taxed upon the ‘settlor’, if the settlor or his spouse retains an interest in the settlement. For the purposes of the legislation, ‘Settlement’ is very widely defined, to include ( inter alia) any ‘transfer of assets’ (see s620 ITTOIA 2005), and could even include an outright gift from one spouse to the other. This would, of course, totally frustrate the objectives of the separate taxation of husband and wife, but for the provisions in s626 ITTOIA 2005 which expressly disapply the ‘settlement’ provisions from applying to outright gifts between spouses and civil partners. However, s626 ITTOIA 2005 does not apply to a gift of property which is ‘wholly or substantially a right to income’. What, exactly, is a gift of ‘wholly or substantially a right to receive income’? This is a matter when the view of the taxpayer and his advisers may differ from those of the Revenue, especially where the subject matter of the gift is an interest in an unquoted, family company. The Revenue arguments were forwarded by the First Tier Tribunal in Patmore v HMRC [2010] UK FTT 334.