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Business Services  •  Business Tax  •  Personal tax

Family ties and tax – understanding ‘connected persons’

By RJP LLP on 24 August 2022

Family structures are getting more and more complicated these days and it can make understanding the rules about ‘connected persons’ for tax planning purposes rather confusing.

The traditional concept of a ‘nuclear family’ has become rather outdated; we now have a high proportion of ‘blended families’ to consider when evaluating how direct tax legislation – capital gains tax, inheritance tax and income tax should be applied. For instance, although the majority of families in the UK with children still involve parents who are married or in a civil partnership, this figure has fallen from 69% to 61% in the past 25 years (ONS data).

It is important to appreciate the connected persons rules for tax purposes because chargeable transfers between connected persons are treated differently for tax purposes than transfers between persons who are not deemed to be connected..

How are individuals connected for tax purposes?

Two people can be connected for the purpose of tax law either through a company, a trust or because they are part of the same family. This has implications for inheritance tax and capital gains tax planning.

It is worth noting the slightly different rules that apply to capital gains tax and inheritance tax:

For capital gains tax purposes, individuals are connected with their:

  • Spouse or civil partner;
  • Brothers and sisters;
  • Ancestors and lineal descendants and their spouses (such as parents, sons, daughters and their husbands and wives);
  • A spouse’s brother or sister;
  • A spouse’s ancestors and lineal descendants.

For inheritance tax purposes, the above is extended to include:

  • Aunts and uncles;
  • Nephews and nieces and their spouses;
  • A spouse’s nephews and nieces.

A trustee of a settlement is, in their capacity as trustee, connected with:

  • The settlor;
  • Anyone who is connected with the settlor and falls into the connected persons category for capital gains tax purposes; and
  • Any close company in which the trustee is a participator; and
  • For inheritance tax purposes, anyone who is connected with the settlor in accordance with the connected persons category for inheritance tax purposes.

For partnership assets, a partner is connected with their partners in the partnership, in addition to the above.

For limited company purposes, an individual is connected with any company of which they have control either by themselves or with a connected person, in addition to the above.

Points to be aware of:

Lineal descendants include all children who have a legal or blood connection, for example legally adopted children and children who are born to parents, whether legally married or not.

Step-families do not fall neatly into any of the groups that are included in, or excluded from, the primary definition. Key to this is whether the relationship was legally formalised, without it they do not have a family connection for tax purposes. If a marriage did exist and the couple later divorced, the step-family connection would be lost.

Marriage and civil partnerships lie at the heart of the concept of connected parties, and it is important to appreciate that the connection will remain, even if the partners have been separated for many years.

Just like other areas of tax law, the connected party rules are becoming a little outdated due to the declining predominance of the nuclear family. If you are considering estate planning for inheritance tax purposes or wish to consider how to make tax efficient gifts to family members, please contact us via

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