Income tax settlements and family companies

Practitioners are well aware that the word ‘settlement’ was defined very widely in s660G Taxes Act 1988 to include ‘any trust covenant or arrangement’ . The intention behind Chapter 1A of Part XV Taxes Act 1988 is to attribute income to the ‘settlor’ for the purposes of taxation. Even those who are not film buffs will doubtless be familiar with the Court of Appeal decision in Crossland v Hawkins . The taxpayer Jack Hawkins, the well-known film star, formed a company which would make his services available to film producers. Shares in the company were settled on trust for his children. The fee charged to the film producer by the company enabled a dividend to be paid to the children trustees. It was held that the arrangement amounted to a ‘settlement’ and that the taxpayer was liable for tax on the income, as the settlor pursuant to the then equivalent of s660A Taxes Act 1988. Now, in an apparently similar arrangement, HMRC has sought to tax a husband on dividends paid to his wife by the company which had been formed to supply the husband’s services as a computer consultant. The House of Lords has now ruled in favour of the taxpayers in Jones v Garnett .