Calculating the TCGA/S87 gain
The basic operation of TCGA92/S87 is:
- capital payments received by the beneficiaries are matched against the trustees’ section 2(2) amount for a year
- the beneficiary is treated as accruing a chargeable gain equal to the amount matched
- the gain accrues to the beneficiary in the year the payment is matched not the year the capital payment is received
- the trustees’ section 2(2) amount for that year and the capital payment are reduced by the amount of the matched payment.
Whether or not the beneficiary is chargeable to Capital Gains Tax on the gain depends on the usual residence rules in TCGA92/S2. The beneficiary will be chargeable only if they are UK resident for the year. See CG25200. If the beneficiary is not UK resident the trustees’ section 2(2) amount is still reduced by the amount of the matched payment even though no amount is charged to Capital Gains Tax. There are two very limited exceptions to this rule. See CG38685 (certain non-resident close companies) and CG38775 (payments received 12 March to 5 April 2008).
If a settlement has both UK resident and non-resident beneficiaries it is quite reasonable for the trustees to reduce the Capital Gains Tax payable by making capital payments to the non-resident beneficiaries first. There is an example of this at D20 in the General Anti-Abuse Rule Guidance available on the HMRC website.
If a capital payment is matched against a section 2(2) amount for a tax year that is more than a year earlier the rate of tax is increased by 10% for a maximum of six years. For example, if a capital payment received in 2015-16 is matched against a section 2(2) amount for 2012-13 the rate of tax is increased by 20%, CG38795.