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HMRC internal manual

Capital Gains Manual

Vulnerable beneficiaries: introduction

The Finance Act 2005 introduced a new regime for trusts where part or all of the settled property is held on trusts for ‘vulnerable beneficiaries’. The special treatment applies to the extent that the property is held on qualifying trusts for the benefit of a vulnerable person. The basic principle is that the overall liability to income tax and Capital Gains Tax is equal to what it would be if the income and chargeable gains belonged to the beneficiary. The treatment applies if an election is in force and there is a claim for the particular tax year.

For the years 2004-05 to 2007-08 this could reduce the CGT payable because the gains are taxed at the beneficiary’s marginal rate rather than the rate applicable to trusts, 40 per cent. For the years 2008-09 and 2009-10 CGT is charged at a single rate of 18 per cent. A claim is likely to be beneficial for these years only if the beneficiary’s unused personal losses or annual exempt amount is greater than that of the trustees.

2010-11 is a transitional year in which the effect of a claim depends on when in the year the chargeable gains accrue. Gains accruing before 23 June 2010 are taxed at the single rate of 18 per cent whether they accrue to an individual or trustees. Gains accruing to trustees on or after 23 June 2010 are taxed at 28 per cent or 10 per cent if Entrepreneurs’ Relief is claimed. Gains accruing to an individual on or after 23 June 2010 are taxed at 18 per cent if the individual’s total income and gains do not exceed the upper limit of the income tax basic rate band. Gains or parts of gains above that limit are taxed at 28 per cent. Gains for the year 2011-12 onwards are taxed at the rate for gains accruing on or after 23 June 2010. Further changes were made to the Capital Gains Tax rates for years from 2016-17 see CG10246.

TSEM3400 onwards describes the special tax treatment and explain how it applies for the purposes of income tax. The guidance in this manual is supplementary to that in TSEM and explains how the special tax treatment applies for the purposes of CGT.

TSEM374+ has examples showing the special treatment applies for income tax.