UK Inland Revenue Reverses Decision Over Offshore Trusts

by Amanda Banks, Tax-News.com, London

10 August 2001

The UK Inland Revenue has decided that capital losses incurred in 1999/2000 by non resident trusts can now be set off against gains for that year.

A statement released by the department explains: 'As a consequence of recent legal advice, the Revenue has changed its position on the availability of net losses realised by non-resident trustees in the "transitional period" from 17 March 1998 to 5 April 1999. Until now we have taken the view that net capital losses incurred in the transitional period are not available for set off against 1999/2000 gains. However we now accept that such losses can in fact be set off in this way.'

This change of view, states the Inland Revenue, is applicable only to non-resident trusts which were outside the scope of the s86 TCGA 1992 settlor charge until the enactment of section 132 FA 1998. Similarly, it is now accepted that net losses incurred by non-resident trustees in 1999/2000 can be set against gains arising in the transitional period in respect of which a settlor is chargeable under section 86.

The Inland Revenue's statement is as follows:

Action: Settlors affected by the transitional provisions whose capital gains position for 1999/2000 has been settled on the basis of our previous interpretation may now amend their self assessments for 1999/2000 in order to put into effect our changed interpretation. The amended self assessment must be submitted before the time limit for amending self assessments expires. In most cases this will be 31 January 2002.

Background: Section 86, TCGA 1992, which charges certain UK domiciled and resident settlors in respect of gains realised by non-resident, or dual resident trustees, was first enacted in FA 1991. This "settlor charge" taxes settlors of trusts in respect of the capital gains accruing from disposals of trust assets by the trustees, where the settlor or certain members of his family has an interest in the trust and certain other conditions are met.

The 1991 legislation excluded from the charge all non-resident trusts created before Budget day, 19 March 1991, subject to certain conditions. Trusts whose gains are within the scope of section 86 are known as 'qualifying settlements'.

Under section 132 FA 1998, all trusts created before 19 March 1991 and otherwise meeting the conditions in section 86, were brought within the definition of qualifying settlements. This was announced on Budget Day 1998 (17 March) and took effect from 6 April 1999. The period from 17 March 1998 to 5 April 1999 was covered by transitional provisions. These are at Schedule 23 FA 1998.

The aim of the transitional provisions was to allow time for trustees not wishing their trusts to become qualifying settlements to remove them from the scope of the settlor charge (e.g. by removing beneficiaries from the trust, or by certain other means). There were also anti-avoidance provisions to stop trustees realising gains in the transitional period and then removing their trusts from the scope of the settlor charge before 6 April 1999. For those trusts where the requisite steps to remain outside section 86 TCGA 1992 were not taken by 6 April 1999, paragraph 1(2)(a) of Schedule 23 FA 1998 applied to treat gains and losses arising between 17 March 1998 and 5 April 1999 as accruing on 6 April 1999 for the purposes of the settlor charge.

Until now our interpretation of the transitional provisions has been that a settlor is taxable in 1999/2000 on any net gain arising in the transitional period, but any net loss arising in the transitional period cannot be set off against any actual gains accruing in 1999/2000. Equally, we considered that losses incurred in 1999/2000 were not available for setting off against net gains which arose during the transitional period. This view was seen as consistent with the general basis of the settlor charge, which attributes only net gains, and not losses, to settlors, and with section 132(5) FA 1998, which prohibits gains and losses arising before 6 April 1999 from being taken into account for the purposes of section 86 TCGA 1992.

However, following recent legal advice we now accept that the wording of paragraph 1(2)(a) Schedule 23 FA 1998 allows for both net gains, and net losses, to be treated as accruing on 6 April 1999.

Consequences: In cases falling within the provisions of paragraph of Schedule 23 FA 1998:

Net capital losses arising on disposals made between 17 March 1998 and 5 April 1999 are available for set off against net capital gains accruing on disposals made between 6 April 1999 and 5 April 2000, for the purposes of calculating the amount on which a settlor is chargeable for 1999/2000 under section 86. To the extent that such losses are not so utilised, they will be available for carry forward in accordance with paragraph 1(6) Schedule 5 TCGA 1992, and so may reduce the amount on which a settlor is charged under section 86 TCGA 1992 for a later year.

Net capital losses arising on disposals made between 6 April 1999 and 5 April 2000 are available for set off against net capital gains arising on disposals made between 17 March 1998 and 5 April 1999, for the purpose of calculating the amount on which a settlor is chargeable under section 86 TCGA 1992 for 1999/2000.
This interpretation will apply to all current open and future self assessments for 1999/2000. As noted above self assessments for 1999/2000 already settled on the basis of our previous view may be reopened, but the amended self assessment must be submitted to the Revenue before the time limit under section 9(4)(b) TMA 1970 expires.

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