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Section 660A, known as the “settlements legislation”, dates back to the 1930s.
It deals with situations where income arises from something, such as shares, given by one
person to another. This type of gift is called a “settlement”.
The purpose of the legislation is to stop people settling their
income on another person who pays tax at a lower rate.
Over the years many contractors have split their shares between themselves and their spouse who might be on a low tax rate.
The split of shares need not be 50/50 but is normally allocated to take advantage of personal tax allowances.
The contractor, using a limited company structure, normally recives a small salary (to minimise National Insurance payments). The rest of the
company profit is then paid as dividends to the shareholders.
If the contractor received all the dividend income it might put them into the higher rate tax bracket for personal taxation. Thus, if the
spouse has a lower income, some shares and thus dividends are given to them. This then reduces the amount of higher rate tax paid.
It is this kind of arrangement that the Inland Revenue is attacking using the Settlements Legislation.
In 2004 Geoff and Diana Jones of Arctic Systems lost their landmark Section 660A appeal, in which the Inland Revenue was
challenging their right to share dividend income in this way. In April 2005, they also lost their Appeal -
meaning the rules are here to stay.
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