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The Treasury has announced that legislation will be introduced to reverse the effect of the House of Lords decision given in Jones v Garnett ("Arctic Systems") earlier this week.

The decision given in Arctic Systems confirms that the exemption from the settlements legislation for outright gifts between spouses is effective in cases where a couple start up a business together, but the exemption also applies where one spouse only subscribes for ordinary shares but does not work. The decision effectively means that married couples setting up in business would be treated in a similar fashion to unmarried couples who do the same. It also means that that the tax treatment is on par with those situations where one spouse sets up a company and then later makes an outright gift of shares to the other.

Of course, the decision was bound to grate with HMRC - the Government wants people to pay tax “on what is, in substance, their own income”. So, it is not unexpected that the day after the decision was announced, the Government issued the following Ministerial Statement:

"The Government acknowledges the judgement given by the House of Lords in the Jones v Garnett (Arctic Systems) case.

The Government is committed to maintaining fairness in the tax system. The case has brought to light the need for the Government to ensure that there is greater clarity in the law regarding its position on the tax treatment of ‘income splitting’.

Some individuals use non commercial arrangements (arrangements that they would not reasonably enter into with an arms-length third party) to divert income (which would, in the absence of those arrangements have flowed to them) to others. That minimises their tax liability, and results in an unfair outcome, increasing the tax burden on other tax payers and putting businesses that compete with these individuals at a competitive disadvantage.

It is the Government’s view that individuals involved in these arrangements should pay tax on what is, in substance, their own income and that the legislation should clearly provide for this. The Government will therefore bring forward proposals for changes to legislation to ensure this is the case. In the meantime, HMRC will apply the law as elucidated by the House of Lords and will be providing guidance in due course.

The Government would not want commercial arrangements to be caught by any change to legislation. Consultation should help to ensure this".

It is not known at this stage how the revised legislation is expected to work in practice.