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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Paragraph 126 elections: what is the effect of the election?

FA08/Sch7/para126(8)

Relief is given for the year in which the capital payment is matched against a section 2(2) amount. A UK resident but non-domiciled individual beneficiary is not liable to Capital Gains Tax on that part of the gain that relates to the period before 6 April 2008. FA08/Sch7/para126(8) restricts the charge to Capital Gains Tax to the “relevant proportion” of the gain.

No effect on ordinary operation of TCGA/S87

The election has no effect on the matching of section 2(2) amounts. The section 87 gain accrues to the UK resident but non-domiciled beneficiary in accordance with the ordinary matching rules. Both the section 2(2) amount and the capital payments are reduced as a result of the matching. The sole effect of the election is to reduce the amount of the section 87 gain on which the UK resident but non-domiciled beneficiary has to pay Capital Gains Tax.

“Relevant proportion” of gain

The “relevant proportion” of the gain is defined in FA08/Sch7/para126(9) as:

A
 
B

A is what the section 2(2) amount would be if it was calculated by reference to the market value of the assets held at 6 April 2008. B is the actual section 2(2) amount. If A is greater than, or equal to, B then all of the gain is liable to Capital Gains Tax.

So if A is £120,000 and B is £200,000 the relevant proportion is 120/200 = 60%. If the section 87 gains accruing to the non-domiciled beneficiary are £40,000 the beneficiary would be charged on only £24,000 of those gains. See CG38865.

Fall in value of asset since 6 April 2008

A section 2(2) amount cannot be a negative amount. So if the value of the asset has fallen since 6 April 2008 the value of A will be reduced to 0 not a negative amount. For example:

Asset:

Cost September 2006 £65,000
   
Market value 6 April 2008 £100,000
Disposal proceeds October 2013 £85,000

A = 0 not -£15,000 and B = £20,000. The relevant proportion is 0/20 and that will reduce any 87 gain chargeable to nil. See CG38870. See 90 year 2013-14 for a more detailed example of a fall in value in which, because of the value of other assets, the value of A is not reduced to 0.

Only value the assets disposed of

The only assets included in the A/B formula are the assets disposed of in the tax year. This means that assets held at 6 April 2008 need be valued only when they are disposed of. If all the later capital payments are made to UK domiciled beneficiaries the 6 April 2008 value of the remaining assets will not be needed.

Asset needs to be held continuously

The asset must be held continuously since 6 April 2008 to qualify for relief, FA08/Sch7/para126(10)(b). FA08/Sch7/para126(13) deals with the case in which TCGA92/S43 applies because the asset is derived from another asset in the same ownership. If the settlement held the old asset at 6 April 2008 paragraph 126(13) provides that the new asset shall be treated as if it were owned on 6 April 2008.