Use of capital losses in UK trust following s90 transfer from offshore trust

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.

Is the comment made in Kessler (I don’t have access to the book) basically that the TCGA 1992 s1(3) amounts in the transferor settlement are already net of capital losses arising in the transferor settlement. Thus, on transfer of such (net) amounts to the transferee settlement no further offset of capital losses in the transferee settlement is allowed?

Such transferred amounts being available for matching to capital payments under s87 until exhausted?

Malcolm Finney

Hi Malcolm

I don’t think so. It doesn’t read that way. Are you thinking that each set of trust’s gains are ringfenced effectively, such that s1(3) gains of the transferor settlement are not aggregated with the gains or losses of the transferee trust? Clearly gains arising to the transferee trust would not be, as any transferee gains would be immediately chargeable in that year, whereas the s90 transferred gains would be carried forward for offset under s87 on capital appointments made. The question is how losses are treated that have already arisen in the transferee trust a day prior to acceptance of the s90 transferred gains. I cannot see any legislation on this.

For clarity in my example, there are no losses in the transferor settlement. The losses arise in the transferee settlement a day before the s1(3) gains are transferred from the transferor settlement under s90 to the transferee trust.

I have since undertaken further research and the position is even more complicated than initially envisaged. The crux of it is that if s90 applies, the assets are transferred over to the new trust at market value - the s1(3) gains that have crystallised on the transferor trust transfer under s90. Thus there can be no capital gain when they are sold immediately by the transferee trust. Therefore, there is no gain against which to offset the loss. The s90 transferred gain crystallises only when an appointment is made to the beneficiaries and is matched under s87. The summary is the brought forward losses of the transferee settlement will be unrelieved, whereas the s90 gains will be matched to beneficiaries.

This is why the question as to whether s165 can apply to the transferor trust gain is more pertinent and this would reduce the s1(3) gain in the transferor trust to nil. S90 would apply but no gains would transfer over and the base cost to the transferee settlement of the assets would be the base cost. The deferred gain would crystallise in the transferee settlement when those transferred assets are sold on the market or appointed out of the transferee settlement. This can then be set against the losses already realised in the transferee trust on their own originally held assets in the same year.