INTM601520 - Transfer of assets abroad: The benefits charge: Interaction with CGT
Where the whole or part of the value of a benefit received in a tax year also satisfies the meaning of a ‘’capital payment’’ (under TCGA92/S97) and is a capital payment to which TCGA92/S87 or S89(2) or paragraph 8 of schedule 4C of TCGA92 applies, it may result in a charge to capital gains tax. For further information on the capital gains tax charges that may arise on beneficiaries of non-resident trusts see CG38200 onwards of the Capital Gains Manual (CG).
If, as a result of the receipt of a benefit, chargeable gains are treated as arising to the beneficiary in the year the benefit is received or in a subsequent year, in any subsequent application of the benefits charge on that individual, a reduction in the amount that may otherwise be charged is provided for by ITA07/S734. In the ‘steps’ computation of the benefits charge set out in INTM601740, the ‘total untaxed benefits’ in the computation will be reduced by the amount of the chargeable gain. This is explained further at INTM601740 and in the example below.
Where a benefit received is fully taken into account for income tax purposes in computing a benefits charge for the individual under ITA07/S731, it will not also be taken into account for the purposes of determining chargeable gains for that or any subsequent year for the individual. The charge under ITA07/S731 will take precedence over the capital gains charge under TCGA92/S87.
Where no historical records of the amounts of capital, income and gains are available, see the guidance note in INTM601700.
The following scenarios are possible in relation to the benefits charge where the benefit received also satisfies the meaning of a capital payment for the purposes of the capital gains tax provisions:
The benefit received can be fully matched with relevant income in the year it is received, and as a result an income tax benefits charge equivalent to the value or amount of the benefit received arises
In such a case, the benefit will not be treated as a capital payment arising to the individual for capital gains tax purposes for that or any subsequent tax year.
There is no relevant income against which a benefit received can be matched
In this case the benefit received will be carried forward to be matched against relevant income arising in subsequent years. Such benefits can also constitute capital payments and can be taken into account for capital gains tax purposes, if the non-resident trustees have capital gains against which the capital payments can be matched. The capital payments will be matched against any gains arising in the year the capital payment was received. If there is still an unmatched capital payment, then this can be matched against any gains of earlier years with the payment set off against the gains of the latest year first. To the extent that the benefit/capital payment remains unmatched, it will be carried forward to be matched against any relevant income or capital gains arising in subsequent years. Where a benefit received is treated as a capital payment for the purposes of calculating a capital gains tax liability, the amount of the benefit taken into account in any subsequent calculation of the benefit charge will be reduced accordingly. This can be illustrated by the following example.
Example
The B Trust, resident in the Isle of Man, makes a capital distribution to Mr X, a beneficiary of the trust, in 2012-2013 of £500,000. There is no relevant income arising in 2012-2013 or in any earlier years, however the trustees did make a capital gain in 2012-2013 of £150,000 and in 2010-2011 of £200,000.
The capital distribution can be matched with the capital gains as follows:
2012-2013 = £150,000
2010-2011 = £200,000
TOTAL = £350,000
So, capital gains of £350,000 will be attributed to Mr X in the year 2012-2013. The balance of the capital distribution, £150,000 (£500,000-£350,000), which has not been matched will be available to match against relevant income or capital gains arising to the trustees in subsequent years.
The benefit received exceeds the relevant income to date and as a result the benefits charge is limited to the amount of relevant income
The excess benefit received over the relevant income is carried forward and can be matched against subsequent relevant income. It can also be treated as a capital payment and be taken into account for capital gains tax purposes if the non-resident trustees have capital gains against which the benefit can be matched. The benefit/capital payment will be matched against any gains arising in the year the capital payment was received. If there are still an unmatched benefit then it can be matched against any gains of earlier years, with the set off against the gains of the later years first. To the extent that the benefit remains unmatched it can be matched against any relevant income or capital gain arising in subsequent years. Where the benefit is taken into account, the amount of benefit taken into account in any subsequent application of the benefits charge will be reduced accordingly. This can be illustrated by the following example.
Example
The C trust, a trust resident in the British Virgin Islands, makes a capital distribution of £500,000 to Mr Y in 2012-2013.There is relevant income of £100,000 arising in the year and capital gains made by the trustees of £150,000. In 2010-2011 the trustees also made a capital gain of £200,000. The capital distribution will be matched with the relevant income of £100,000 and this will be assessable under ITA07/S731.
The balance of the distribution will be matched with the trustee gains as follows:
2012-2013 = £150,000
2010-2011 = £200,000
TOTAL = £350,000
So, capital gains of £350,000 will be attributed to Mr Y in the tax year 2012-2013, the balance of the distribution, £50,000 (£500,000-(£100,000 +£150,000+£200,000)), which has not been matched will be available to match against relevant income or capital gains of subsequent years.