Taxation Readers’ Forum: Vulnerable beneficiary? CGT and trust tax returns

/ 14 January 2020

Terry Jordan

Writing for Taxation magazine’s Readers’ Forum, BKL tax consultant Terry Jordan answers a reader’s query about the treatment of capital gains tax (CGT) exemption on a trust tax return.

‘I am having trouble with HMRC with regards to the effects of a vulnerable beneficiary election on a trust’s capital gains tax liability.

The clear effect of FA 2005, s 31 is to allow the trustees a full capital gains tax annual exempt amount (rather than the usual 50%), and to allow the trust’s taxable gains to be charged at 10% or 18% to the extent that the beneficiary has unused basic rate band.

For the past three years, I have made this calculation, explaining it in the ‘white space’, and HMRC has amended the return to charge all the gains at the higher rate. For the past two years, it has accepted my rejection of the amendment, but I would prefer not to have to go through the extra step.

There is a box on the return (5.14) for ‘Claim to special capital gains tax treatment where a vulnerable beneficiary election has effect – amount of relief claimed’ – but that appears to be part of a calculation of taxable gains, rather than a reduction in the tax rate.

Should I be putting a tax reducer in that box, or is there a different way of persuading HMRC to apply the law?

I look forward to any thoughts on this from Taxation readers.’ Query 19,485 – Baffled.

Terry Jordan’s reply

‘FA 2005, s 37 governs the election by trustees and a vulnerable person.

Baffled is dealing with the self-assessment tax return for a trust with a vulnerable beneficiary. FA 2005, s 30 provides for special capital gains tax treatment as long as a claim is made by the trustees.

If the vulnerable beneficiary is UK resident the treatment is set out in FA 2005, s 31. The trustees’ liability is reduced by an amount equal to TQTG-VQTG, where:

  • TQTG is the amount of capital gains tax to which the trustees would otherwise be liable; and
  • VQTG is derived from TLVA-TLVB, where:
    • TLVB is the total amount of capital gains tax to which the vulnerable person is liable for the tax year; and
    • TLVA is what TLVB would be if the qualifying trust gains accrued to the vulnerable person (instead of to the trustees) and no allowable losses were deducted from the trust gains.

HMRC’s Capital Gains Manual at CG35500 explains: ‘The basic principle is that the overall liability to income tax and capital gains tax is equal to what it would be if the income and chargeable gains belonged to the beneficiary. The treatment applies if an election is in force and there is a claim for the particular tax year.’

FA 2005, s 37 governs the making of the joint election between the vulnerable person and the trustees. The election is irrevocable and remains in force until:

  • the person ceases to be vulnerable;
  • the trust ceases to be qualifying; or
  • the trust is terminated.

Claims are made by the trustees alone in accordance with FA 2005, s 24. The trust tax return guidance for 2018-19 states that box 8.18 should be ticked if an election has been made even if it is not intended to make a claim for special treatment for the year and that relief claimed against capital gains tax should be entered in box 5.6; the figure to include is the amount of relief claimed.’

The article is also available on the Taxation website.

For more information about trusts and their tax implications, please get in touch with your usual BKL contact or use our enquiry form.

Terry Jordan

Senior Adviser, Private Client

T +44 (0)20 8922 9360
E terry.jordan@bkl.co.uk

View Profile