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HMRC internal manual

Capital Gains Manual

Capital payments - TCGA92/S87


The definition of capital payment is in TCGA92/S97(1) and is very wide. It means:

Any payment other than a payment:

  • chargeable to Income Tax if it is received by a UK resident
  • received as income if it is received by a non-resident
  • under an arm’s length transaction.

Exclusion for Income Tax

The exclusion for amounts chargeable to Income Tax includes both actual income receipts and amounts deemed to be income for tax purposes. For example:

  • Trust income payable to a life tenant including distributions of accumulated income.
  • Distributions of income treated as income of the settlor when it arises, ITTOIA05/S624(1).
  • Capital distributions taxed as income under ITA07/S733. If section 733 applies after the year in which the benefit is received that benefit may be treated as a capital payment in the earlier years, TCGA92/S97(3).
  • Offshore income gains taxed as income, SI 2009/3001 reg 18.
  • From 6/4/17 the exclusion in TCGA92/S97(1)(a) was amended to exclude income chargeable to tax under any of S643A, 643J and 643L ITTOIA 2005. Additionally, TCGA92/S97(3) was amended to cover section 643A, 643J and 643L ITTOIA 2005 and sections 731 to 733E of ITA 2007.

If the payment is received by a non-resident the question whether it is received as income depends on the trust law treatment.

Exclusion for arm’s length transactions

The exclusion for arm’s length payments covers commercial transactions. It also allows the trustees to enter into commercial transactions with connected persons such as the settlor. This is because ‘a transaction at arm’s length’, the term used in TCGA92/S97(1), is not the same as ‘a bargain made at arm’s length’, the term used in TCGA92/S18(2).

Section 18 treats an acquisition and disposal between connected persons as a bargain not made at arm’s length and imposes the market value rule in TCGA92/S17. So if the trustees buy an asset from the settlor sections 17 and 18 will treat the acquisition as taking place at market value whatever the terms of the contract. But if the trustees pay a commercial price for the asset the payment is not a capital payment for the purposes of section 87. If the trustees pay more than the market value that may be a capital payment.

The exclusion for payments under arm’s length transactions is also relevant to the provision of benefits, see CG38640. Trust property occupied by a beneficiary at a commercial rent or a loan on commercial terms would not be a capital payment.

Exclusion for statutory rights to reimbursement

A beneficiary or settlor who has pays tax in respect of a non-resident settlement may have a statutory right to recover that tax from the trustees. For example, a repayment of Income Tax to a settlor under ITTOIA05/S646 or Capital Gains Tax under TCGA92/Sch5para6. This is not treated as a capital payment.