Since then, the trust has just held cash, which it is looking to partially distribute to my client in the next few weeks, and I would like to understand the tax implications of the transfer for my client?
A: Where a UK resident beneficiary of a non-UK resident trust receives a capital payment, the beneficiary can be chargeable on:
- Available income of the trust under the Transfer of Assets Abroad (TOAA) regime of Chapter 2 Part 13 ITA 2007, and
- Stockpiled capital gains of the trust under s.87 TCGA 1992.
Occupation of trust property by a UK resident beneficiary can be such a capital payment. However, there is no mention of such occupation nor of any trust income here. The income tax charge under the TOAA regime takes priority over the capital gains charge – s37 TCGA 1992.
The trust’s historic gains should be calculated as though the trust was UK resident, and then matched with the capital payment to the beneficiary on a ‘last in first out’ basis (CG38575).
The matched gain is then added to the beneficiary’s chargeable gains for the tax year of the distribution and charged at the appropriate rate of CGT (CG38785).
In your client’s scenario, the trust is non-UK resident and has a capital gain arising on UK residential property. As non-UK resident trusts are within the charge to CGT on UK residential property since 6th April 2015, a chargeable gain will have arisen.
By default, and assuming no alternative election has been made by the trustees, the trust’s base cost for the property will have been re-based to its market value on 6th April 2015 under Sch 4AA TCGA 1992. The trust would have then been charged to the residential rates of CGT on the gain arising between 6th April 2015 and the date of disposal in 2020.
When calculating the capital gain for the purpose of the matching rules, the trust’s gain needs to be calculated as though the trust was UK resident at the time of disposal. This means the rebasing rules under Sch 4AA TCGA 1992 are ignored, and the capital gain is calculated in the normal way.
However, as the trust has already been charged to CGT on the post 6th April 2015 element of the capital gain, this part of the gain is excluded from the calculation – s87(5A) TCGA 1992. As stated in the Croner-i Direct Tax Reporter at 359-850:
“Where for tax years 2019-20 and subsequent years, the s. 1(3) amount would include a chargeable gain or allowable loss falling within TCGA 1992, s. 1A(3)(b) or (c) (direct or indirect disposals of UK land – see ¶592-555ff.) that gain or loss is excluded from the s. 1(3) amount (TCGA 1992, s. 87(5A)). Consequently, it cannot be attributed to the beneficiaries, the logic clearly being that it is in fact assessable on the trustees.”
Therefore, the stockpiled gain is initially calculated as the sale proceeds less the original cost, but from that gain is deducted the gain already charged on the trust.
If there is a delay of more than one tax year between the trust’s gain and the capital payment made to the beneficiary, a supplementary charge will arise under s.91 TCGA 1992. The supplementary charge increases the rate of capital gains tax applicable to the matched gain. This increase is 10% for the “chargeable period” up to a maximum of 60% (CG38795).
As the capital payment was m10ade more than one year after the trust’s gain arose in 2019/20, an increase to the rate of CGT is made under s91 TCGA 1992 up to a maximum of 60% (CG38795).
The increase is charged at 10% per year over the “chargeable period” which is 1st December 2020 to 30th November 2025 – s91 TCGA 1992. HMRC helpfully provide a table in their annually updated Helpsheet HS301. The chargeable period is 5 tax years, meaning a 50% increase will be applied to the CGT rates.
