CG38985 - Calculating unmatched section 2(2) following transfer of settled property before 6 April 2008 - example

TCGA92/Sch7para121

In 2005-06 there is a transfer of settled property to which section 90 applies. At the time of 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. The cash remains in the transferor settlement.

As not all the trust assets have been transferred only a proportionate part - 4/5ths - of the trust gains (section 2(2) amounts) will be transferred to the transferee settlement.

Transferor settlement
Transferee settlement

Transferor settlement

Details of the trustee’s gains and capital payments made are:

Year - Amount
2002-03 section 2(2) amount £50,000
2003-04 section 2(2) amount £10,000
2004-05 Capital payment £30,000
2005-06 Trustees’ gains on transfer (section 2(2) amount) £75,000
2006-07 Capital payment £5,000

Under Step 1 of paragraph 121(3) you apply the general rules in paragraph 120 to calculate the unmatched section 2(2) amounts for the years up to and including the year of transfer, 2005-06.

The only section 87 gains that accrued in those years are £30,000 in 2004-05. The £30,000 is the ‘total deemed gains’ of the transferor settlement up to and including 2005-06. Under Step 3 of paragraph 120 these are set against the earliest year’s trustees’ gains on a FIFO basis. That leaves an unmatched section 2(2) amount of £20,000 for 2002-03 (£50,000 - £30,000). The unmatched section 2(2) amounts for 2003-04 and 2005-06 remain unaltered.

Next, under Step 5 of paragraph 121(3) Schedule 7, you have to deduct the amount of unmatched section 2(2) amounts that are treated as transferred to the transferee settlement. The amounts treated as transferred are 4/5 (£400,000 / [£400,000 + £100,000]) of each of the unmatched section 2(2) amounts. So the unmatched section 2(2) amounts remaining in the transferor settlement after the transfer of settled property are:

Year Amount -
2002-03 £4,000 ([£50,000 - £30,000] x 1/5)
2003-04 £2,000 (£10,000 x 1/5)
2005-06 £15,000 (£75,000 x 1/5)

Finally, under Step 6 of paragraph 121(3) Schedule 7, you apply the general rules in paragraph 120 to identify the unmatched section 2(2) amounts for all years up to and including 2007-08. In applying these rules you treat:

  • the section 2(2) amounts for years up to and including the year of transfer - 2005-06 - as those just calculated under Step 5 of paragraph 121(3) Schedule 7, and
  • in ‘total deemed gains’ include only the section 87 gains that have accrued in the years after the year of transfer to 2007-08 that is 2006-07 and 2007-08. The section 87 gains for the years before the year of transfer have already been matched and are ignored.

In 2006-07 and 2007-08 the ‘total deemed gains’ are the £5,000 section 87 gains which accrued in 2006-07. Under Step 3 of paragraph 120(3) Schedule 7 these are all set against the earliest year’s unmatched section 2(2) amounts on the FIFO basis. This includes years before the year of transfer. £4,000 is set against 2002-03 and the remaining £1,000 against 2003-04. The final unmatched section 2(2) amounts for the transferor settlement at the end of 2007-08 are:

Year Amount -
2002-03 Nil (£4,000 - £4,000)
2003-04 £1,000 (£2,000 - £1,000)
2005-06 £15,000 -

Transferee settlement

Details of the trustees’ gains (excluding amounts transferred under section 90) and capital payments made are:

Year - Amount
2002-03 section 2(2) amount £40,000
2003-04 section 2(2) amount £5,000
2004-05 Capital payment £20,000
2006-07 Capital payment £45,000

Under Step 2 of paragraph 121(3) you apply the general rules in paragraph 120 for identifying unmatched section 2(2) amounts. But you only apply them for the year before the year of transfer and earlier years; that is 2004-05 and earlier years.

In those years section 87 gains of £20,000 accrued in 2004-05. This £20,000 is the ‘total deemed gains’ of the transferee settlement up to and including 2004-05. Under Step 3 of paragraph 120 these are all set against the earliest year’s trustees’ gains. That leaves an unmatched section 2(2) amount for 2002-03 of £20,000 (£40,000 - £20,000). The unmatched section 2(2) amount of £5,000 for 2003-04 remains unaltered.

Under Step 3 of paragraph 121(3) you then calculate the section 2(2) amount for the year of transfer, 2005-06. There is no section 2(2) amount for this year.

Next, under Step 4 of paragraph 121(3), you add in the section 2(2) amounts transferred from the transferor settlement for years up to, and including the year of transfer. So the unmatched section 2(2) amounts for these years for the transferee settlement become:

Year Amount -
2002-03 £36,000 ([£40,000 - £20,000] + [{£50,000 - £30,000}x 4/5])
2003-04 £13,000 (£5,000 + [£10,000 x 4/5])
2005-06 £60,000 (£75,000 x 4/5)

Finally, under Step 7 of paragraph 121(3), you apply the general rules in paragraph 120 for identifying unmatched section 2(2) amounts for all years up to and including 2007-08. In applying these rules you treat

  • the section 2(2) amounts for years up to and including the year of transfer - 2005-06 - as those just calculated under Steps 2 to 4 of paragraph 121(3) , and
  • only include in ‘total deemed gains’ the chargeable gains that have been treated as accruing to beneficiaries in the year of transfer to 2007-08 inclusive; that is 2005-06 to 2007-08 inclusive. The gains in the earlier years have already been matched and are ignored.

In the years 2005-06 to 2007-08 £45,000 section 87 gains accrued in 2006-07. These are the ‘total deemed gains’ for 2005-06 to 2007-08. Under Step 3 of paragraph 120(3) these are set against the earliest year’s unmatched section 2(2) amounts on the FIFO basis. £36,000 is set against 2002-03 and the remaining £9,000 against 2003-04. So the final unmatched section 2(2) amounts for the transferor settlement at the end of 2007-08 are:

Year Amount -
2002-03 Nil (£36,000 - £36,000)
2003-04 £4,000 (£13,000 - £9,000)
2005-06 £60,000 -