What is Section 660A?

The ‘settlements legislation’, formerly Section 660A Income and Corporation Taxes Act, and now found at Sections 619 et seq , Income Tax (Trading & Other Income) Act, has been on the statute book since the 1930s, but in recent years HM Revenue & Customs (HMRC) has been trying to extend the way in which it is applied.

The intention of the legislation is to prevent one person from obtaining a tax advantage by diverting income-generating property to another whilst retaining an interest in that property. It excludes an outright gift to a spouse that is substantially more than a right to income, such as a house that is let to earn rental income.

Following the Pre Budget Report (PBR) 2007, the Government intends to introduce legislation aimed at tackling ‘income shifting’ i.e. income diverted from one spouse to another via company dividends or partnership profits.

The PBR announcement follows HMRC’s defeat and ungracious acceptance of the Arctic Systems decision in the House of Lords and will address the issue of individuals arranging their tax affairs to shift part of their income to another individual who pays tax at a lower rate. The legislation, which will aim to take effect from 6th April 2008, will only apply where income is diverted by way of company dividends or partnership profits. Income from other sources should not be affected

HMRC has stated that it will take into account the activity of individuals in the business, investments that they have made and the risks they are exposed to by being involved in the business.

If the Government is intending to push this legislation through for the next tax year then there will only be a short consultation period evoking memories of the MSC consultation period – not a good omen!

Who could it affect?