In an earlier article, I considered the most fundamental of capital gains tax issues, namely, who is chargeable? The conclusion, perhaps unsurprisingly, was that most of the clients of most advisers, with the exception of a few non-doms, would, in theory at least, be within the charge to CGT on the disposal of chargeable assets.
However, it could also be true to say that the gains made by many of them in a tax year would be exempt by virtue of being below the annual CGT exempt amount.
It could also be true to say that even if many will not pay CGT, they may well still be interested in any changes that have taken place and finding out if they will be affected so it is important to know the fundamentals and one of the most important fundamentals is knowing who is and who is not within the charge – in a bit of detail.
With this in mind, it is worth knowing that there are circumstances in which a capital gain does not directly accrue to a person but nevertheless that person is liable to CGT on part or all of that capital gain. This is known as attribution. There are special provisions for attributing capital gains for CGT purposes to:
- A person who is resident or ordinarily resident in the UK. The gain attributable is his share of chargeable gains accruing to a closely controlled non-resident company of which he is a participator – section 13 Taxation of Chargeable Gains Act 1992 [TCGA] – unless his share of the gain (taking account of the share(s) of a connected person(s)) amounts to less than one-tenth of the total gain.
- A beneficiary of a non-resident settlement who
– is either resident or ordinarily resident in the UK, and
– has received a capital payment from the trustees
will have attributed to him his share of any gains accruing to the settlement. If the beneficiary is non-domiciled, the remittance basis will apply if he/she has elected for it. The settlement must be connected to the UK through the domicile and residence of a settlor in order to be caught – section 87 TCGA.
- A settlor with an interest in a non-resident or dual-resident settlement – all (or occasionally part) of the chargeable gains accruing to the trustees. This extends to the case where the settlor’s children, adult or minor, or their spouses or civil partners have an interest in the settlement – section 86 TCGA.
In all these cases, the chargeable gains in question are added to the chargeable gains of the taxpayer and are charged at his/her rates. Losses can be set against them and the annual exempt amount is deducted from the total chargeable gains of the taxpayer.
The person chargeable is normally the beneficial owner of the asset which has been disposed of. Any actions by:
- bare trustees (that is, where the person is absolutely entitled to property held by trustees)
- receivers, liquidators or trustees in bankruptcy
- mortgagees or charge holders or any other persons entitled to the asset by way of security
are attributed to the beneficial owner so that any gain or loss accruing on an actual disposal of the asset by the nominee, etc accrues to the beneficial owner (and not the nominee).
The transfer of legal ownership between a nominee, etc and the beneficial owner does not constitute a disposal for CGT purposes.
This is especially useful where assets, for example, collective investments, are held on bare trust for a beneficiary who attains the age of majority and the trustees transfer the assets held on bare trust to the beneficiary.
What about partners in a partnership? Well, where two or more persons carry on a trade or business in partnership, disposals of chargeable assets owned by the partnership are treated as disposals by the partners and not by the firm as such, and capital gains tax is assessed and charged on the partners individually. The gains attributed to each partner normally reflect their declared share of the partnership business.
Trustees and personal representatives are treated as a single and continuing body of persons regardless of any changes in the persons acting.
Assessments are to be made on those in office at the time of the assessment, not those in office when the gain was made.
Trustees are chargeable to capital gains tax if they are all UK-resident or if at least one is UK-resident and at least one is not UK-resident and the settlor was resident, ordinarily resident or domiciled in the UK at the time he made the settlement – section 69 TCGA.
Personal representatives are chargeable to capital gains tax if the deceased was resident or ordinarily resident in the UK when he or she died – section 62(3) TCGA.
The trustee investment market is one that should be appealing to advisers looking to collaborate with other professionals (for example, accountants and solicitors) who are often the gatekeepers to this market.
The financial adviser can bring very specific investment skills to bear and, combined with a broad understanding of trustee investment principles and the relevant law, would stand an excellent chance of establishing a strong relationship with other professionals based on mutual professional trust. The rise in the trustee income tax rate to 50 per cent, as well as the CGT changes, represent tremendously powerful reasons to seek out potential professional collaboration.