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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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UK resident beneficiary: tax years 2004-05 to 2007-08: Increase in liability

It is not possible for the income tax liability to be increased as a result of the special treatment. This is because FA2005/S26 provides for the trustees’ income tax liability to be reduced by the particular calculation in question.

However it is possible for the CGT liability to be increased in exceptional circumstances. This can happen in at least two types of case.

The first is an increase in absolute terms. Suppose there is an interest in possession settlement for a vulnerable beneficiary. The annual exempt amount is, say, £8,500 for both the trustees and the beneficiary on the basis that the trustees’ qualify at the rate for trustees of settlements for the disabled, CG18050+. The trustees have a chargeable gain of £6,000. The beneficiary has a chargeable gain of £5,000. Without the special treatment applying there would be no liability to CGT. If the special treatment applies there is a liability by reason of section 77 on £2,500 (£6,000 + 5,000 - 8500).

The second is that the way in which losses are used may bring different results in different years. Suppose the trustees of a settlement have a fund held on non-qualifying trusts and a fund held on qualifying trusts. Suppose there are allowable losses on the former of £10,000 and chargeable gains on the latter of £15,000. If a claim is made for this year the £15,000 will be attributed to the beneficiary, but the £10,000 can be carried forward. If a claim is not made then the trustees have net gains of £5,000.

A claim is not always beneficial. This is why there is an annual claims procedure rather than an automatic consequence of making an election.