CG38520 - Tainting - TCGA92/S86
TCGA92/Sch5/para9(1B) to 9(6A)
Tainting was an important concept before FA 1998 extended the definition of qualifying settlement to apply to all settlements except protected settlements. A settlement created before 19 March 1991 for the benefit of the settlor or their immediate family would not be a qualifying settlement and section 86 would not apply unless it became tainted after 19 March 1991. Tainting now applies only to protected settlements, see CG38460, and settlements for grandchildren, see CG38475.
Protected settlements
If the beneficiaries took the trouble to make a pre-19 March 1991 settlement a protected settlement it would be unusual for it to become tainted.
A protected settlement will become tainted if one of the following conditions applies. The first four conditions are the original conditions and have applied from 19 March 1991. The final fifth condition was added in 1999 and applies from 6 April 1999.
On or after 19 March 1991
- new property or income is provided directly or indirectly to the settlement, paragraph 9(3)
- the trustees become non-resident or treaty non-resident, paragraph 9(4)
- the terms of the settlement are varied so that a defined person can benefit paragraph 9(5), or
- even though the terms of the settlement do not allow a defined person to benefit in practice they do receive a benefit, paragraph 9(6).
The definition of defined person is in paragraph 9(7). They are the same as the persons in paragraph 2(3). See CG38470. The fourth condition covers the case in which payments are made in breach of trust. HMRC published extensive guidance on the interpretation of these conditions in SP5/92. Extracts from SP5/92 are icluded in CG38527.
On or after 6 April 1999
- the settlement ceases to be a protected settlement, paragraph 9(6A).
A settlement would cease to be a protected settlement if one of the settlor’s children reaches the age of 18 without being excluded as a beneficiary. The settlement would become a qualifying settlement in the year the beneficiary reached 18. If the settlement is to remain protected it would be necessary to remove the child as a beneficiary in the tax year before this happened.
Civil partners
The reference to civil partners in the list of defined partners was inserted with effect from 5 December 2005. Settlements created before that date will not have excluded civil partners as potential beneficiaries as the concept did not exist before then. They did not become tainted merely because of this omission.