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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Basic operation of FA08/Sch7/para126 - example

Settlement X is a non-UK resident settlement created in September 2000. The trust fund consists of a number of quoted investments. Some of these have been held since September 2000. Others have been acquired since 6 April 2008. The settlement has two UK resident beneficiaries. Y is domiciled in the UK. Z is not domiciled in the UK.

As at 6 April 2008 there are no unmatched capital payments and section 2(2) amounts.

2012-13

In 2012-13 a section 2(2) amount of £180,000 accrues to the trustees and capital payments of £50,000 are made to Y and Z. The capital payments are matched to the section 2(2) amount as shown below.

  2012-13 Matched c/f
       
Section 2(2) amount £180,000 £100,000 £80,000
Capital payments Y £50,000 £50,000 nil
Capital payments Z £50,000 £50,000 nil

A chargeable gain of £50,000 accrues to each beneficiary. Beneficiary Y is liable to Capital Gains Tax on the full amount of £50,000. The trustees make a valid election under paragraph 126(1) of Schedule 7 before 31 January 2014. The effect of the election is to reduce the gains chargeable on beneficiary Z.

You calculate the section 2(2) amount that the trustees would have made if the gain were calculated by reference to the 6 April 2008 value of assets held at that date and included in the disposal.

  Held 6/4/08 Acquired after 6/4/08 Total
       
Disposal Proceeds £180,000 £170,000 £350,000
Acquisition cost £10,000 £160,000 £170,000
Gain £170,000 £10,000 £180,000
Disposal Proceeds £180,000
   
6/4/08 value £165,000
Gain £15,000

Relevant proportion of s87 gain (for Z) =

£50,000 x 15,000+10,000 = £6944
         
    180,000    

Beneficiary Z is liable to Capital Gains Tax on £6944 of the £50,000 capital payment. If beneficiary Z is a remittance basis user the gain will be taxed only when the gain is remitted to the UK.

2013-14

The trustees dispose of assets creating a £20,000 section 2(2) amount. They make capital payments of £15,000 to each beneficiary. £10,000 of each capital payment is matched to the 2013-14 section 2(2) amount. Section 87 gains of £10,000 accrue to each beneficiary in respect of the 2009-10 section 2(2) amount. The £5,000 balance of each capital payment is matched to the £80,000 2012-13 section 2(2) amount. Section 87 gains of £5,000 accrue to each beneficiary in respect of the 2012-13 section 2(2) amount giving total chargeable gains of £15,000 for 2013-14 for each beneficiary. The capital payments for that year are reduced to nil. The section 2(2) amount for 2012-13 is reduced to £70,000.

  Amount/payment   Matched Year c/f
           
2013-14 Section 2(2) amount £20,000 £20,000 2013-14 Nil
  Capital payments Y £15,000 £10,000 2013-14 nil
      £5,000 2012-13  
  Capital payments Z £15,000 £10,000 2013-14 Nil
      £5,000 2012-13  
2012-13 Section 2(2) amount £80,000 £10,000 2013-14 £70,000

Beneficiary Y will be liable to Capital Gains Tax on the full £15,000 section 87 gain. Beneficiary Z’s liability will be reduced in accordance with paragraph 126(8) of Schedule 7. This has to be calculated separately for the £10,000 payment matched to the 2013-14 amount and the £5,000 payment matched to the 2012-13 amount.

For 2013-14 the figures are:

  Held 6/4/08 Acquired after 6/4/08 Total
       
Disposal proceeds £70,000 £100,000 £170,000
Acquisition cost £65,000 £85,000 £150,000
Gain £5,000 £15,000 £20,000
Disposal proceeds £70,000    
6/4/08 value £80,000    
Loss (£5,000)    

The section 2(2) amount calculated using 6 April 2008 values is £10,000 i.e. £15,000 - £5,000. The relevant proportion of the £10,000 section 87 gain is:

£10,000 x 10,000 = £5,000
         
    20,000    

The Capital Gains Tax liability on the £5,000 section 87 gain relating to the 2008-09 section 2(2) amount is limited to:

£5,000 x 25,000 = £694
         
    180,000    

Z’s total liability to Capital Gains Tax in 2009-10 is on gains of £5,694 (£5,000 + £694). If beneficiary Z is a remittance basis user the gain will be taxed only when the gain is remitted to the UK.