We have a situation where capital gains would arise in an offshore trust on the sale of unquoted trading shares. The client has another (UK) trust (same beneficiaries) where a loss will arise on the sale of another holding in the same stock of unquoted trading company shares. Ideally, we want to offset the gains against the losses and propose doing this by transferring the shares at a gain from the offshore trust to the UK trust. This question relates to use of UK trust losses against s90 gains or held over gains arising from the transfer from the offshore trust.
For IHT reasons (reduction in value relief for PETs we need to sell the shares in the UK trust (standing at a loss) first before any transfer takes place, so the loss will be carried forward to be used a few days later, on the receipt/sale of the transferred shares.
As an aside, the offshore trust is not an excluded property trust, and we are happy that the shares will remain in the old settlement for IHT purposes – they attract BPR in any event.
S90 TCGA 1992 will apply to transfer any chargeable gains (historical s1(3) gains and indeed gains realised on the disposal of the current trust assets under the transfer) from the offshore trust to the UK trust. I have read, at page 105 (Chapter 63) of Kessler’s Taxation of Non-Domiciliaries… (2020-21), that the losses of the transferee settlement cannot be offset against the s1(3) gains transferred from the transferor trust.
I am familiar with s1E(4) whereby personal losses of an individual cannot be offset against s87 gains but despite searching for legislation that states the losses cannot be offset against the transferred s1(3) gains I cannot find this. Is anyone able to advise where this rule is or whether the rules have in fact changed since the rewrite?
I know there is an anti-avoidance section where the interest is the settlement has been acquired for consideration (s90A) and s79A (but this does not apply). Also, there is s16A but we are happy that the loss would have arisen to the UK trust anyway and has not arisen in connection with any other arrangement – the gain has, but not the loss.
I have also read the manuals at CG38610 - Trustees’ gains - section 2(2)* amount - HMRC internal manual - GOV.UK. These do not seem to talk about any loss restrictions.
If there is a rule that disallows the offset of losses in this way, would the ability to holdover the gain under s165 help? Can s165 apply so there are no s1(3) gains and if there is any restriction to offsetting such gains against brought forward losses, this will not apply. The gains will simply crystallise on sale of the shares with the brought forward loss of the same year being offset.
I would appreciate any help anyone can give. The matter is quite urgent.