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HMRC internal manual

Capital Gains Manual

TCGA92/S90 - order of matching if capital payments made out of transferor settlement in year of transfer - example

This example illustrates the principle that you match the capital payments made in the year of transfer before calculating the section 2(2) amounts to be transferred. This applies whether the capital payment is made before or after the transfer.

The transferor settlement’s assets consist of shares with a market value of £400,000 and cash of £100,000. The shares are transferred to the transferee settlement for nil consideration in 2012-13. The cash remains in the transferor settlement.

The transferor settlement has the following gains made by the trustees:

2005-06 Trustees’ gains (section 2(2) amount) £20,000
2012-13 Section 2(2) amount on transfer of shares £75,000

The transferor settlement makes a capital payment of £50,000 in 2012-13. It does not matter if this made before or after the transfer of the shares. This payment is matched with £50,000 of the 2012-13 section 2(2) amount and a section 87 gain of £50,000 accrues to the beneficiary in 2012-13. The unmatched section 2(2) amount for 2012-13 is reduced to £25,000 (£75,000 - £50,000).

It is only the ‘relevant proportion’ of this £25,000 that is transferred to the transferee settlement. The relevant proportion is 4/5 (£400,000 / [£400,000 + £100,000]).

Transferee settlement

The transferee settlement acquires the following unmatched section 2(2) amounts:

2005-06 £16,000 (£20,000 x 4/5)
2012-13 £20,000 (£25,000 x 4/5)

They are added to any unmatched section 2(2) amounts it already has and can be matched with capital payments made from the transferee settlement in 2012-13 or a later year.

This applies whatever the residence status of the transferee settlement.

Transferor settlement

The unmatched section 2(2) amounts of the transferor settlement are reduced by the section 2(2) amounts transferred to the transferee settlement. The unmatched section 2(2) amounts become:

2005-06 £4,000 (£20,000 - £16,000)
2012-13 £5,000 (£25,000 - £20,000)

This reduction has effect for matching in the year after the year of transfer (2013-14) and subsequent years.