CG35501 - How the CGT legislation works: introduction
Introduction
The special treatment can be claimed only if the trustees are resident in the UK, FA05/S30(1)(c).
If the beneficiary is resident in the UK for the year 2008-09 onwards the gains are taxed on the trustees. If they claim the special treatment the tax is reduced to the amount that would have been payable if the gain had accrued to the beneficiary. Guidance on cases where the beneficiary is UK resident for the tax year 2008-09 onwards is in CG35522.
If the beneficiary is not resident in the UK the gains are taxed on the trustees in all years. But if they claim the special treatment the tax is reduced to the amount that would have been payable if the gain had accrued to the beneficiary. Guidance on cases where the beneficiary or trustees are non-resident are dealt with at CG35543.
Vulnerable persons
The main guidance on the legislation affecting settlements with vulnerable beneficiaries is to be found in TSEM3400+.
TSEM3420 (FA2005/S23(7)) defines vulnerable person; such persons may be either
- disabled persons meeting particular conditions, see TSEM3421+ (FA2005/S38(1)), or TSEM3425+ (FA2005/S38(2)) if the person is not resident. The tests largely reflect those in force for the annual exempt amount (CG18050+) except that they extend to situations where the person ceases to receive the particular allowance because he is in care etc.(FA2005/S38(3)) or
- relevant minors, see TSEM3423 (FA2005/S39).
Qualifying trusts
The legislation can apply only where the settled property is held on qualifying trusts. Broadly the legislation applies to settled property which is held on trusts (using the word “trusts” as equivalent to “terms on which the property is held”) which secure that over particular periods only the vulnerable person can benefit. See TSEM3430 (FA2005/S34) for the conditions for trusts for disabled persons and TSEM3435 (FA2005/S35) for relevant minors to be qualifying trusts.
It is not necessary to look at the settlement as a whole. You can look at individual funds within a settlement provided that the property is effectively ring fenced. For example, suppose there is a conventional discretionary settlement for the grandchildren of X. There is only one grandchild, Y, who is a disabled person. This settlement would not qualify because further grandchildren could be born and thereby qualify as beneficiaries during Y’s lifetime. Suppose now that the trustees appoint a discrete fund of shares to be held on life interest trusts for Y, with no power to appoint the shares to anyone else during her lifetime. Such a fund would meet the test in section 34. But only the settled property inside that fund would be taken into account. The trustees would be assessed to income tax and CGT on the rest of their income and gains in the normal way.
Elections and claims
The special tax treatment for trusts with vulnerable beneficiaries only applies for a tax year if the trustees have made a claim. The normal time limit for claims applies, see TMA1970/S43(1). However, they can only make a claim for a tax year where two conditions are met. Firstly, that in the tax year they hold property on qualifying trusts for the benefit of a vulnerable person. Secondly, a joint election has been made by the trustees and the vulnerable person under FA2005/S37. See TSEM3450.
The vulnerable person is not a party to the claim but is to the election. The special treatment applies both to income tax and CGT. It is not possible to claim special treatment for one tax and not the other, although there may be cases where only one tax is affected even though there are chargeable gains and income (see TSEM3461).
Elections
TSEM3450+ explain how the election is to be made and what details are required. The election can take effect from a specific date. If this falls during the tax year, for income tax purposes it applies for the latter part of the year only (FA2005/S29), but for CGT purposes it applies for the whole year (FA2005/S31). Similarly, if the election ceases to apply, the income tax treatment applies for the first part of the year, but the CGT treatment applies for the whole year.
Claims
Claims are made by the trustees, see TSEM3460 (FA2005/S24).