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HMRC internal manual

Capital Gains Manual

Overview of TCGA92/S86

Section 86 was introduced by Schedule 16 FA 1991. Before then gains accruing to non-resident trustees were charged only under TCGA92/S87 when the trustees made capital payments. This could mean a long delay between the gain accruing and any UK tax charge.

Basic conditions

The basic conditions for section 86 to apply are:

  • the settlor is UK resident and domiciled (or deemed domiciled), CG38440
  • the trustees are not resident in the UK throughout the tax year or are UK resident only under the terms of a DTA, CG38450
  • the settlement is a qualifying settlement, CG38455
  • the settlor has an interest in the settlement, CG38465. If these conditions are met chargeable gains of an amount equal to the gains accruing to the trustees are treated as accruing to the settlor in the tax year the gains accrue to the trustees, section 86(4).

    The definitions needed to support section 86 are in Schedule 5 TCGA.

    Qualifying settlements

    Nearly all non-resident settlements are qualifying settlements.

    When section 86 was introduced the only qualifying settlements were:

 

  • settlements created on or after 19 March 1991
  • earlier settlements which were affected in certain ways, a process commonly called tainting. A major change in 1998 was to extend section 86 so that it applied to all settlements whenever they were created unless the settlement was a protected settlement. A protected settlement is a settlement in which the only members of the settlor’s immediate family who can benefit are their minor and unborn children and future spouses. Pre-19 March 1991 settlements were given a year to make themselves protected settlements otherwise they became qualifying settlements.

    Impact of deemed domicile status 2017/18 onwards

    On becoming deemed domiciled under either condition A or B of section 835BA ITA 2007 a non- domiciled individual is brought within the scope of section 86 TCGA 1992.

    Some general guidance on conditions A and B is in CG38435. Detailed guidance is in the Residence, Domicile and Remittance Basis manual.

    Where just condition B applies, provided the trust does not become tainted, the long term deemed domiciliary will not be within the scope of s86 for that trust but continue to be within the scope of S87/TCGA1992. (See CG38570+).

     

    The tainting provisions can be found at Sch 5 para 5A and para 5B TCGA 92, S628A and S628B ITTOIA 05 and S721A, S721B and S729A ITA 07 for the capital gains tax provisions, settlements legislation and transfer of assets legislation respectively.  However, what constitutes the tainting of a protected settlement is the same in each of the respective pieces of legislation.   The basic proposition is that no property or income can be ‘provided’ either directly or indirectly to the settlement by the settlor, or by the trustees of another settlement of which the settlor is the settlor or a beneficiary, at a time in ‘the relevant period’ when the settlor is domiciled or deemed domiciled in the UK. The ‘relevant period’ is defined as a period, which begins with 6 April 2017 or, if later, the creation of the settlement.  The relevant period ends with the ending of the tax year under consideration.  When considering the tainting provisions it is also important to consider whether any property has been ‘provided’ directly or indirectly by the settlor, or by the trustees of another settlement of which the settlor is the settlor or a beneficiary, to any underlying entities owned by the settlement at any time during the relevant period.

    Detailed guidance on the tainting provisions will be included within the Trust, Estates and Settlements manual.