Offshore trusts

matching with gains

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My client came to the UK last year.  She was previously non dom and non res.

She is the beneficiary of an offshore trust in Guernsey, set up by her father (also non dom and nom res).  The trust is non resident and no one else involved in the trust is (or has even been) in the UK. 

She wants to receive some trust funds in the UK.  The trustees are happy to oblige.  This will be a capital distribution.

Up until 2018, prior to the rule change, the gains will all have been washed out by distributions to various beneficiaries.  There was a big capital gain after 5/4/2018, some of which has been distributed to my client before she came to the UK.

Assuming there are insufficient current capital gains in the current year to match against the proposed capital distribution, would matching in the current year still go back to the 2018 capital gain, even though she has already received this prior to becoming UK resident?

Seems a bit unfair, but I guess tax is not always fair...

Thank you for your thoughts and wisdom.

Replies (13)

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By taxdigital
30th Aug 2023 08:20

s.87(2) TCGA talks about chargeable gains accruing in the relevant tax year to the beneficiary of a non-resident trust. S.15(2) defines chargeable gain to mean - every gain except as otherwise expressly provided, to be a chargeable gain. The trust and the beneficiary were non-residents before. For a non-resident, the only chargeable gains are those within s.1B, C & D, which presumably have nothing to do with the trust’s previous gains. Consequently, in my view the current capital payment can’t be matched against gains made in non-resident years.

However, I think this ‘unmatched’ capital payment may be carried forward and matched against future gains.

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Replying to taxdigital:
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By snickersinatwix
30th Aug 2023 08:32

Thank you very much. Yes, no doubt unmatched gains will be carried forward.

Presumably you would, on the same basis, not allow losses brought forward either? There is a wholly owned investment company with capital losses brought forward as well.

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By Tax Dragon
30th Aug 2023 12:53

S87(2) is a deeming provision ("treated as"). The above interpretation of it fails to recognise that point.

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Replying to Tax Dragon:
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By Justin Bryant
30th Aug 2023 14:07

No sh*t. Now you can pedantically tell us the same re s731 ITA 2007 re income "treated as".

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Replying to Justin Bryant:
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By Tax Dragon
30th Aug 2023 14:50

I don't think it pedantry to point out an answer was wrong.

It probably would be pedantry to point out that s731 is a charging provision (the deeming is done by s732(2)) - but I like a bit of pedantry, so I'm pointing that out.

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By taxdigital
30th Aug 2023 16:45

Tax Dragon wrote:

S87(2) is a deeming provision ("treated as"). The above interpretation of it fails to recognise that point.

a) So, if it’s a deeming provision what difference it makes to the interpretation?

Tax Dragon wrote:

I don't think it pedantry to point out an answer was wrong.

In which case:

b) What do you think is wrong with the answer timed 30th Aug 2023 08:20 , and consequently,

c) What then is the correct answer?

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Replying to taxdigital:
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By Tax Dragon
30th Aug 2023 18:09

You have started from the position of what a chargeable gain is. Having determined that there are no chargeable gains, you conclude the payment cannot be matched (except in the future).

Being a deeming provision means that s87(2) can deem a chargeable gain to accrue when otherwise there wouldn't be one.

Tbh it would be pretty pointless if it converted a chargeable gain into a chargeable gain.

Note also that s87(4) gives a section-specific meaning to "s1(3) amount".

(Justin hints at a good point though. The distribution is matched to gains only if it's not matched to income. Offshore trusts will bite the unwary where they don't want to be bitten. OP's willingness to take your wrong answer as right does not inspire confidence that the correct tax treatment is heading in the direction of the client.)

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Replying to Tax Dragon:
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By taxdigital
30th Aug 2023 18:54

I'm afraid your comment doesn't answer the questions.

Tax Dragon wrote:

You have started from the position of what a chargeable gain is. Having determined that there are no chargeable gains, you conclude the payment cannot be matched (except in the future).

Being a deeming provision means that s87(2) can deem a chargeable gain to accrue when otherwise there wouldn't be one.

Tbh it would be pretty pointless if it converted a chargeable gain into a chargeable gain.

As far as I'm aware, the UK beneficiary of a non-resident trust in receipt of a capital payment is liable to a TCGA charge because of s.87, no other sections, deeming otherwise. If you believe s.87 isn't in point then there is no tax charge. So, what are you driving at?

Tax Dragon wrote:

Note also that s87(4) gives a section-specific meaning to "s1(3) amount".

So what?
s.1(3)Capital gains tax is charged on the total amount of chargeable gains accruing to a person in a tax year after deducting.....

Tax Dragon wrote:

(Justin hints at a good point though. The distribution is matched to gains only if it's not matched to income. Offshore trusts will bite the unwary where they don't want to be bitten.

That makes no sense to me. It's about CGT here.

Tax Dragon wrote:

OP's willingness to take your wrong answer as right does not inspire confidence that the correct tax treatment is heading in the direction of the client


That deserves no comment from me.
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Replying to taxdigital:
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By Tax Dragon
30th Aug 2023 20:38

Your first post read to me (and I apologise if I misread it) as saying that the only gains (that could be matched under s87) were those within [chargeable by virtue of] s.1B, C & D, and that this had nothing to do with the trust's previous gains. As, consequently, the capital payment could not be matched against gains made in non-resident years... aha! This is where I misread you. You're talking about beneficiary residence. I thought you meant trustee residence.

OK, on my new reading of your first post, you think s87 applies only if the beneficiary is resident both in the year the trustees make the gain and in the year the trustees make a capital payment to the beneficiary.

Is that what you meant? So the gain still has to be a chargeable gain for s87 to apply (in your view).

But what makes a trustee gain in a year in which
- they are not resident in the UK
- the beneficiary is
- there is no capital payment
a chargeable gain?

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Replying to Tax Dragon:
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By taxdigital
30th Aug 2023 21:40

Tax Dragon wrote:

Your first post read to me (and I apologise if I misread it) as saying that the only gains (that could be matched under s87) were those within [chargeable by virtue of] s.1B, C & D, and that this had nothing to do with the trust's previous gains. As, consequently, the capital payment could not be matched against gains made in non-resident years... aha! This is where I misread you. You're talking about beneficiary residence. I thought you meant trustee residence.

OK, on my new reading of your first post, you think s87 applies only if the beneficiary is resident both in the year the trustees make the gain and in the year the trustees make a capital payment to the beneficiary.

Is that what you meant? So the gain still has to be a chargeable gain for s87 to apply (in your view).

Isn't pretty clear from the OP that neither the trust nor the beneficiary were tax resident(s) in the UK previously and the gain accrued before the beneficiary became tax resident in the UK? In which case the trust's liability to UK tax is in point only in situations under s.1?

Tax Dragon wrote:

But what makes a trustee gain in a year in which
- they are not resident in the UK
- the beneficiary is
- there is no capital payment
a chargeable gain?

Before I answer this question, which I'm quite happy to, can I have the answers to the questions raised in my comment timed 30th Aug 2023 16.45?

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Replying to taxdigital:
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By Tax Dragon
30th Aug 2023 23:05

You keep throwing out section numbers while seemingly restricting me to s.87 and "no other sections" (your comment 18:54).

Tbh I'm happy to limit my comments to s87. Accordingly, I'm going to simplify this. I'll ignore all other transactions, all income tax [and for that matter other CGT] rules and everything else - just look at s87.

For context, an offshore trust makes a capital gain in 2018/19 and makes a payment to a beneficiary in 2023/24 (a year during which the beneficiary is at some point UK resident). All other facts are ignored. Do I think s87(2) could deem a chargeable gain to accrue on the basis that the beneficiary has received a payment? Yes. Does that answer depend on the residence of the beneficiary in 2018/19? No.

Now, you were saying...?

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Replying to Tax Dragon:
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By taxdigital
31st Aug 2023 08:29

Tax Dragon wrote:

You keep throwing out section numbers while seemingly restricting me to s.87 and "no other sections" (your comment 18:54).

I would ignore this not being relevant to the discussion.

Tax Dragon wrote:

Tbh I'm happy to limit my comments to s87. Accordingly, I'm going to simplify this. I'll ignore all other transactions, all income tax [and for that matter other CGT] rules and everything else - just look at s87.

Fair enough

Tax Dragon wrote:

Do I think s87(2) could deem a chargeable gain to accrue on the basis that the beneficiary has received a payment? Yes. Does that answer depend on the residence of the beneficiary in 2018/19? No.

Now, you were saying...?

Now let me make my point clear:
- Trustees gains per s.1(3) are stock piled from day 1 of settlement. However, in this case the beneficiary being non-domiciled gains accruing from 06 April 2008 need be considered.
- When capital payments are made, they are matched on a LIFO basis and would reduce the stockpiled gains. This is subject to various anti-avoidance legislation.

Now have a read of this -CG38575
If the beneficiary is an individual the gains accrue whether or not the beneficiary is UK resident but the gains are charged to Capital Gains Tax only if they are UK resident. If the beneficiary is not resident the trustees’ section (1(3) (old 2(2) amount is still reduced but there is no charge to Capital Gains Tax.

I interpret this to mean the 2023-24 capital payment would indeed reduce the stockpiled gains, however, no charge to CGT arises on the beneficiary.

PS - I may not be commenting any further this week.

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Replying to taxdigital:
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By Tax Dragon
31st Aug 2023 08:53

"I interpret this to mean the 2023-24 capital payment would indeed reduce the stockpiled gains, however, no charge to CGT arises on the beneficiary."

That seems a very different conclusion from that in your first post.

We at least now seem to agree that s87(2) could apply and the payment and the 2018/19 gain could be matched.

I'm happy to leave it there.

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