The trustee of an offshore trust have made a capital distribution to a UK resident beneficiary, representing her share of capital such that it is considered that she has no ongoing interest in the trust.
The trustees have confirmed that there are no gains attributed to the transfer. However, they refer to the possibility that future gains may be attributed to the distribution. I am not currently aware of the trust’s assets to see whether they hold investments that are likely to give rise to such gains.
My client is looking for certainty. Is there a period after which no gains could be attributed to her?
The distribution was recommended by her IFA and took place before I was instructed.
There is no time limit which restricts the attribution of future s2(2) gains to an earlier capital payment. Even if the capital payment was made to a trust beneficiary and at a later date when matching is possible the beneficiary is no longer a beneficiary matching still occurs [s87(2)].
Only in any tax years following the tax year of death can matching of s2(2) gains to an earlier capital payment no longer occur.
The CGT legislation is draconian as regards non-resident trusts. The short answer is that the trustees are right. Their future gains can be matched with earlier unmatched capital payments to a resident beneficiary and charged to tax on her: s87A TCGA 1992, Step 5. As this will be a taxable gain of the future year in which the gain arises, assessment time limits will run only from then. There is no time limit as regards the period between the gain arising and the earlier date the capital payment was received. The beneficiary thus has a technical exposure to tax at whatever is her future CGT rate under whatever is the law in force in the future year the gain arises whenever that occurs.
One dubious silver lining is summarised in CGM 38605 and even that turns on the trustees’ timing of future disposals and distributions:
"Death
If a beneficiary dies having received unmatched capital payments those payments cannot be matched against trustees’ [section 1(3) amounts]* for years after the year of death. They can be matched with [section 1(3) amounts]* for the year of death even if the trustees’ disposal is after the date of death.
(*trustees’ net chargeable gains) "
She could makes sure she retains funds to cover a liability of, say, 40% or even 50% x Capital Payment Amount by not spending all of it but much will depend on her other available resources. The rate of tax has never yet exceeded 100%.
She could ask the trustees about their current holding of chargeable assets but gains could even arise from assets they do not even yet hold. They plainly do not intend to distribute more to her but, crazily, future gains not fully distributed to others could still be taxed on her.
It is now no longer possible to “wash out” gains by trustee payments to non-chargeable beneficiaries and the other reforms to these rules in FA 2018 have further curtailed other cute operations for avoiding tax. One of these reforms is based on “alternative facts”: that a resident settlor is a beneficiary of the trust, though if deceased he is not (yet) deemed to remain alive. But we have a government which “rules nothing out”!
The law in this area could well have been drafted by Franz Kafka or Lewis Carroll. As there is no exclusion for trusts set up by non-dom non-res settlors which contain only non-UK assets (compare IHT excluded property rules) it reflects HMRC’s paranoia and HMG’s supine indulgence of it. Your query raises just one of the oppressive potential consequences of this extra-territorial megalomania. The scope for CGT avoidance by resident and domiciled settlors using such trusts was drastically diminished by FA 1991.
Jack Harper
I am not aware of any limitation to the period during which future gains may be attributed, except of course on cessation of the trust. The (slightly) good news is that any such future gains would firstly be matched against any capital payments made to other beneficiaries in the same year that gains arose and then would be matched working back on a LIFO basis, so she would presumably always be among the last to suffer any matching. Also those matched gains would be deemed to arise in the year they arose to the trustees, rather then the earlier year when she received her capital payment, unlike when elderly gains are matched against a capital payment and a 10% for each year surcharge arises. Since 2019 the position is now slightly more complex since no matching occurs in respect of capital payments made to non-UK residents, except in the year of cessation.
regards