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TaxationWeb by Laura Hutchinson ATT ATII

Tax planning can assist in the use of personal capital losses. Laura Hutchinson, an associate of Forbes Dawson, explains the new rules allowing the extended use of such losses against attributed trust gains.Prior to the 2002 budget, personal capital losses could only be offset against personal capital gains.

This was a restrictive measure that affecting those individuals who had incurred personal capital losses and who also were assessable to capital gains from trusts.

Before the budget announcement, any trust gains were chargeable on the individual at their rates of tax, without the availability to offset any of capital losses arising to them personally.

In the budget, these provisions were overturned and relief is now available to offset individual’s personal losses against capital gains arising to them by virtue of usual trustees disposals.

The personal losses must firstly be used against personal gains; only the remaining losses are available to reduce attributed trust gains.

Who will Benefit?

The new rules will affect settlors of trusts taxable on capital gains arising in the trust.

Settlors who are taxable on trust gains include:

• UK resident and domiciled settlors of offshore trusts, whose family members are beneficiaries
• UK resident settlors of UK trusts where the settlor of his/her spouse can benefit

There are other scenarios where the settlor or beneficiaries of a trust are assessable to trust gains. Unfortunately, these situations are not covered by the new rules.

The settlors are assessable each year to the capital gains (after trustees’ losses) arising in the trust. The personal losses will simply reduce the trust gains assessable on them.

When does this take Effect?

If the settlor has any personal losses arising from 6 April 2000, it is possible to elect that these are offset against any trust gains for that or a future year. As this is a retrospective relief this can only be obtained by election.

The new provisions automatically take effect from 5 April 2003. There will be no need for an election from this date and it is expected that the relief will be available by allocation of the losses on the self-assessment tax return.

Use of Planning to Maximise Relief

The timing of the disposals giving rise to the trustees’ capital gains will be important, as personal losses can only be utilised against gains made in the same or following years. There is no ability to carry back the personal losses, so it is important that the trustees are aware of the individual’s personal tax situation. They may then consider the timing of any sales, or in the case of beneficiaries, of any appointments of capital.

Care also needs to be taken that personal capital gains are not realised in the same year as the losses, if the losses are required to offset against attributed trust gains.

Bespoke Planning

Depending upon the level of personal losses there are other areas of planning that can be explored, including planning between husband and wife, and restructuring of offshore structures to realise a capital gain to offset against a personal loss.
The planning opportunities will always depend upon the individual circumstances of the trustees, and the settlor.

Further Information

If you require any advice on your, or your client’s situation, involving the most effective use of personal losses please contact Laura Hutchinson on 0161 245 1098 or by email at laura@forbesdawson.co.uk.