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Matthew Hutton, Presenter of the ‘Private Client Monthly Tax Update’ Webinars, highlights a potential Capital Gains Tax planning point.

New Regime Introduced by FA 2006 for CGT and Income Tax

Where within a single settlement there is more than one ‘sub-settlement’ or ‘sub-fund’, whether or not with separate trustees, the net gains of those sub-settlements or funds form part of the overall chargeable gains of the main settlement. By way of exception to this principle, trustees of the ‘principal settlement’ may now elect that a fund (or other specified portion) of the settlement shall be treated for CGT purposes as a separate settlement (TCGA 1992 Sch 4ZA).

Conditions

These are:

• the principal settlement is not itself a sub-fund settlement;
• the sub-fund does not comprise the whole of the property in the principal settlement;
• there is no asset an interest in which is comprised both in the sub-fund settlement and in the principal settlement; and
• no person is a beneficiary under both the sub-fund settlement and the principal settlement.

The four conditions must be satisfied when the election is made. And the last three conditions must be satisfied throughout the period from the time when the election is treated as taking effect and ending immediately before the election is made.

Procedure

The sub-fund election is made on form SFE1 and must be made on or before the second 31 January after the year of assessment in which the effective date falls. The sub-fund election cannot take effect before the day on which it is made, it must contain certain declarations, statements and information and it may not be revoked.

Consequences of a Sub-Fund Election

On creation of the sub-fund the trustees of the principal settlement will make a disposal for CGT purposes. The trustees of the sub-fund settlement are treated as having acquired the relevant property at the date of the election taking effect and for a consideration equal to the then market value of the relevant assets (subject to any Hold-Over election).

The Income Tax provisions are found in ITA 2007 s 477.

(Hutton on Estate Planning Third Edition 4.8.5)

The Planning Suggestion by Chris Whitehouse

Perhaps an unlikely scenario, but consider the possibility that the conditions for the sub-fund regime were met when the sub-fund was established before 23 June 2010, perhaps without intending to secure the advantage of the regime. Now, however, an election will secure the 18% rate, though of course the tax will fall due on the 31 January following the end of the relevant tax year.

(Contribution from Michael Jepson of Pitmans, reporting a planning suggestion by Chris Whitehouse made at the recent STEP Update Conference)

Further Observations

This must be quite an unlikely, albeit possible, scenario for retrospectively achieving the benefit of the 18% rate. More probable perhaps would be the three situations specifically referred to in Finance (No 2) Act 2010 Schedule 1, as follows:

Transitional Rules

A lot of the questions that were being raised on the Trusts Discussion Forum between the date of the Budget and the issue of the Finance Bill are answered by Schedule 1 paras 18-22. In particular:

• Temporary non-residents; that is, the gains of those who return to the UK in 2010/11, having realised gains in the less than five complete tax years while they have been abroad, are treated as accruing before 23 June 2010, regardless of when the taxpayer actually returns.
• Chargeable gains treated as accruing to remittance basis users accrue on the date of remittance.  This is subject to the qualification that where the remittance is out of a mixed fund they are treated as remitted before 23 June, provided that they are actually remitted before 6 April 2011.
• Chargeable gains accruing to a settlor of a settlor-interested trust under s 86 on an arising basis are treated as accruing before 23 June, whenever in tax year 2010/11 the trustees realise the gain.
• In the case of s 87 gains (capital payments), s 89 gains (migrant settlements) or Sch 4C gains (trustee borrowing), the critical date is that of receipt of the capital payment as to whether the 18% or the 28% rate applies. That said, if the beneficiary of an offshore trust receives a capital payment before 23 June which is unmatched and the corresponding section 2(2) amount gains are realised before 6 April 2011, the deemed gain will be treated as accruing before 23 June.

There is therefore some planning perhaps to be considered before the end of this tax year in terms of:

• remittances by a non-UK domiciliary from a mixed fund;
• realisation of gains by UK trustees which are assessed on the settlor under s86; and
• the triggering of a section 2(2) amount to help a UK resident beneficiary who has received an unmatched capital payment before 23 June.

About Hutton Webinars

Continual difficulties and hassles of travel to a lecture/conference venue and costs constraints have led to the increasing popularity of the Webinar as a forum for delivering information in a cost-efficient and effective way. This is a facility which Matthew is now offering to his clients. All you need to attend is a PC or a Mac with Internet access.

Starting on Wednesday 19 January 2011, Matthew will be running a monthly 75-minute Private Client Tax Update webinar at lunchtime (1.00 - 2.15pm) to cover all that you need to know to advise your clients more effectively, in terms of Decided Cases, Legislative Changes, HMRC Practice and Tax Planning Tips and Traps.  The flyer and registration form (see below) give the prices and further details. Note that, for registrations received by Matthew before 1 January 2011, there is a 10% discount on all the prices.

For further information, see: Private Client Monthly Tax Update 2011 Webinars

For a registration form: Private Client Monthly Tax Update 2011 Webinars Registration Form