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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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FA08/Sch7/para126 and section 13 gains - example

X is a non-UK resident settlement. It has two UK resident beneficiaries, A and B. A is UK domiciled. B is non-UK domiciled. The trust fund includes assets held directly and as a loan creditor participator in a non-resident close company, Y Ltd. Section 13 TCGA applies to Y Ltd. Because Y Ltd has a number of loan creditors the proportion of X’s interest in Y Ltd fluctuates.

In 2014-15 the trustees of X sell assets owned from before 6 April 2008 accruing a gain of £200,000. In the same year Y Ltd sells assets held from before 6 April 2008 accruing a gain of £800,000. X’s interest in Y Ltd at the date of disposal was 40%. 40% of Y Ltd’s gain is attributed to X, £320,000. The smallest proportionate interest the trustees held in Y Ltd from 6 April 2008 to the date of disposal was 30%.

X’s section 2(2) amount for 2014-15 is £520,000 (£200,000 + £320,000).

In 2014-15 the trustees make capital payments of £100,000 to each beneficiary. Section 87 gains of £100,000 accrue to each beneficiary. X’s section 2(2) amount for 2014-15 is reduced by £200,000 to £320,000. The capital payments of each beneficiary are reduced to nil.

A is liable to Capital Gains Tax on the £100,000. The trustees make a valid election under paragraph 126(1) by 31 January 2016 and B’s liability is reduced by paragraph 126. It is necessary to calculate the relevant proportion of the £100,000 chargeable gain. This has two elements to it. The gain on the assets held directly by the trustees and the gain on the disposal by Y Ltd attributed to the trustees by section 13 TCGA. Assume that paragraph 126 reduces the gain on the disposal of the assets held directly by the trustees from £200,000 to £40,000. It is then necessary to calculate the effect of paragraph 126 on the section 13 gain, £320,000.

First you calculate the appropriate proportion of the assets sold by Y Ltd, paragraph 126(18). This is the smallest proportionate interest the trustees had in Y Ltd, 30%, divided by their proportionate share at the date of disposal, 40% - that is 30/40 × 100 = 75%. So paragraph 126 applies to 75% of the assets Y Ltd sold.

    para 126(11) no para 126(11)
       
Disposal proceeds £1.2m £900,000 £300,000
Acquisition cost £400,000 £300,000 £100,000
Gain w/out para 126 £800,000 £600,000 £200,000
Disposal proceeds £1.2m £900,000 not relevant
6/4/08 value £1m £750,000  
Gain with para 126 not relevant £150,000  

The trustees rebased gain on the appropriate proportion of Y Ltd’s assets is 40% of £150,000 = £60,000. The remaining 25% of the £320,000 section 13 gain, £80,000, is not rebased. This amount has to be included in the numerator (A) in the paragraph 126(9) calculation of the relevant proportion of beneficiary B’s chargeable gains. That requires a calculation of the section 2(2) amount as if every relevant asset had been sold immediately before 6 April 2008. The £80,000 does not come from the disposal of a relevant asset but is still part of the section 2(2) amount.

The relevant proportion of B’s chargeable gains is:

Reduced section 2(2) amount
 
Original section 2(2) amount

So the computation would be:

(£60,000 + £40,000 + £80,000) x £100,000 = £34,615
         
£520,000        

B is liable to Capital Gains Tax on £34,615 of the £100,000 section 87 gain. If B is a remittance basis user the gains will not be chargeable until they are remitted to the UK.