IFM37740 - Accruals basis elections: prevention of double taxation

Introduction

TCGA92/S103KFC

Making an election under TCGA92/S103KFA does not displace the ordinary tax rules which apply at the time that a sum actually arises to an individual. This includes the rules contained in TCGA92/S103KA-H and the income based carried interest rules in ITA07/S809FZA-Z. This is in part because it may be the case that once a sum actually arises to the individual from the investment scheme then it is taxable as income rather than as a chargeable gain subject to capital gains tax.

Where an individual has accrued a deemed chargeable gain under TCGA92/S103KFA and has paid capital gains tax on that deemed chargeable gain, if the individual subsequently incurs a UK tax liability on a sum that arises from the same investment scheme then the individual the individual can make a claim under TCGA92/103KFC for adjustments to be made to that other UK tax liability to avoid double taxation.

It is sufficient for the purposes of claiming relief under TCGA92/103KFC that the sum arises from the same investment scheme. There is no requirement to demonstrate that the profits which gave rise to a deemed chargeable gain under TCGA92/103KFA were the same as the profits which constitute the carried interest which has actually arisen.

The adjustment must not exceed the lesser of the capital gains tax charged under new section 103KFA and the amount of the other tax.

No relief is available under this provision for non-UK tax charges.

Making a claim

TCGA92/S103KFC

A claim may be made in a return, amendment of a return or in writing to HMRC (see CG13700P) under the general rules contained in TMA1970/S42. Under TMA70/S43 a claim must be made within four years from the end of the year of assessment to which it relates. For the purposes of s103KFC the year of assessment will be the year in which the secondary UK tax liability arises.

HMRC may seek to test the validity of any claim and so evidence should be retained by the individual to support their claim.

Where a return can be amended under normal time limits, the most practical solution is to amend the return. Any claim that falls after this window should be made in writing to an officer of HMRC.

Whichever method is used to make a claim, claimants should provide the following:

  • The date on which the claim was made.
  • The tax year for which the claim was made.
  • The name of the individual and the investment scheme/schemes for which the s103KFA election applies.
  • An explanation of the circumstance giving rise to the claim,
  • Details of the tax paid by the claimant or another person or company (where relevant). This should include the amount, the other person’s Unique Tax Reference (UTR) and the tax year the payment relates to.

Whilst not required under TCGA92/S103KFC, this information will assist HMRC Officers in more readily determining the extent to which the consequential adjustments claimed are just and reasonable.

For information on where to send a claim outside of a return see IFM37770 for detail on reporting elections and sums being taxed on the elective accruals basis.

Double taxation adjustment

TCGA92/S103KFC

The value of adjustments made cannot exceed the lesser of:

  • The capital gains tax paid in respect of the deemed chargeable gain accrued under TCGA92/S103KFA; and
  • The other UK tax charge incurred on the sum arising from the same investment scheme.

TCGA92/103KFC is the only provision under which a claim may be made in respect of tax paid under TCGA92/S103KFA. TCGA92/S103KE (IFM37400) cannot be used for this purpose.

However, TCGA92/S103KE remains available where more than one tax charge applies at the time that the sum arises, so that such sums can be netted against each other before a claim is made under TCGA92/S103KFC.

TCGA92/S103KE also remains available where a tax charge has been paid for carried interest arising prior to an election under TCGA92/S103KFA.

Example

Roberta has made an election under TCGA1992/S103KFA in respect of an investment scheme and has paid capital gains tax at 28% on gains of £100,000 (£28,000 of tax) which have been deemed to accrue to her under TCGA1992/S103KFA.

Roberta has subsequently received carried interest of £50,000 from the same investment scheme in the form of UK source dividend income. The sum which has arisen will be:

  • Subject to capital gains tax at 28% as a carried interest gain computed under TCGA1992/S103KA (£14,000 of tax).
  • Subject to an income tax charge at 39.35% on the dividends under ordinary principles (£19,675).

Roberta can make a claim for an adjustment under TCGA92/S103KE in respect of the capital gains tax charge of £14,000, so that only the income tax charge of £19,675 remains. Roberta can then make a claim under TCGA92/S103KFC to adjust the income tax of £19,675 to take account the tax which has already been paid in relation to gains deemed to arise under TCGA92/S103KFA.

As the total amount of tax paid by Roberta in respect of chargeable gains deemed to arise under TCGA92/S103KFA (£28,000) is greater than the total amount of tax payable in respect of the carried interest which has arisen to her (£19,675), Roberta can claim an adjustment of up to £19,675, reducing the income tax liability to nil.

Roberta would then have a balance of £8,325 (£28,000 - £19,675) of tax paid on gains deemed to arise under TCGA92/S103KA in respect of which relief can be claimed under TCGA92/S103KFC in future years.

As is clear from this example, the fact that an income tax charge (£19,675 in the example) is used as the basis for a claim to adjust the charge to capital gains tax under TCGA92/S103KE does not prevent that same income tax charge then being adjusted on a claim under TCGA92/S103KFC.