1. These measures provide for a capital gains tax charge to arise in certain circumstances where a beneficiary of a trust sells his or her interest in it to someone else on or after 21st March 2000. The trusts principally concerned are UK trusts in which the settlor has an interest or where any of the trust property is derived from a trust which was a settlor-interested trust at any time in the previous two tax years. The effect of the provisions is to treat the underlying assets to which the interest relates as though they are disposed of by the trustees and immediately reacquired by them at market value.

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2. Clause 90 inserts a new section, section 76A, in the Taxation of Chargeable Gains Act 1992 (TCGA). Section 76A gives effect to a new Schedule to the TCGA, Schedule 4A, which is set out in Schedule 24 to the Finance Bill. The new TCGA provisions have effect in relation to disposals for consideration of interests in settled property made, or effectively completed, on or after 21st March 2000.

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3. Paragraph 1 provides that Schedule 4A has effect where there is a disposal for consideration of "an interest in settled property", as defined in paragraph 2. This expression has a wide meaning, and includes, for example, the right to enjoy any benefit arising from the exercise of a power by the trustees in relation to a trust or by anyone in relation to settled property.

4. Paragraph 3 sets out the circumstances in which a disposal of an interest is "for consideration" for the purposes of Schedule 4A. There is a disposal for consideration if consideration is given or received by any person for, or in connection with, any transaction by virtue of which the interest is disposed of. Any consideration consisting of another interest under the same settlement is disregarded if that interest has not previously been disposed of for consideration. For the purposes of Schedule 4A, consideration must be actual consideration, as distinct from consideration which is deemed to be given under any TCGA provision.

5. Where Schedule 4A applies in relation to a trust, and three specified conditions are met (see paragraphs 6 to 8 below), paragraph 4 provides that the trustees are treated for TCGA purposes as disposing of and immediately reacquiring "the relevant underlying assets" (see paragraph 12 below). In most cases, this "deemed disposal" occurs at the time of the disposal of the interest in question, but where the disposal of that interest "begins" in one tax year and is "effectively completed" in another (see paragraph 13(2)), paragraph 13(3)(a) provides that the deemed disposal occurs in that later year.

6. Paragraph 5 contains the first condition. It is that the trustees satisfy a UK residence requirement for the tax year in which the interest is disposed of ("the relevant year of assessment"). Where the disposal begins in one tax year and is effectively completed in another, paragraph 13(3)(b) provides that the condition is satisfied if it is met in relation to either of those two years or any intervening year.

7. Paragraph 6 contains the second condition. It is satisfied if anyone who is a "settlor" in relation to the trust (see paragraph 16 below) is resident or ordinarily resident in the UK in the relevant year of assessment or any of the preceding five tax years. (Tax years prior to 1999-00 are disregarded for this purpose.) Where the disposal of the interest in question begins in one tax year and is effectively completed in another, paragraph 13(3)(c) provides that the condition is satisfied if it is met in relation to either of those two years or any intervening year.

8. Paragraph 7(1) contains the third condition. It is met if the trust is a "settlor-interested settlement" (see paragraph 10 below) at any time in "the relevant period" (see paragraph 9 below), or if, at any time in that period, the settled property of the trust includes any property which is directly or indirectly derived from another trust which is itself a settlor-interested settlement at any time in that period. In this latter case it is only necessary for that other trust to have been a settlor-interested settlement at some time during the relevant period.

9. Paragraph 7(2) defines "the relevant period". Except in the case where the disposal of the interest in question begins in one tax year and is effectively completed in another, the relevant period starts on the 6th April falling two years before the beginning of the relevant year of assessment and ends when the interest is disposed of. As far as the exceptional case is concerned, paragraph 13(3)(d) provides that the relevant period starts on the 6th April falling two years before the beginning of the tax year in which the disposal begins and ends when it is effectively completed. Paragraph 7(3) provides that in any case where, according to these rules, the relevant period would begin before 6th April 1999, it begins on that date instead.

10. Paragraph 7(4) provides that a trust is a "settlor-interested settlement" if anyone who is a settlor in relation to it has an interest in the settlement at any time in the relevant period, or had such an interest at any time in that period prior to becoming a settlor. The rules used to determine whether a settlor has, or had, an interest are essentially the same as those used for the purposes of section 77 TCGA.

11. Paragraph 7(5) provides that the third condition (see paragraph 8 above) is treated as not met in a tax year in which the settlor dies, and, in some cases, in a tax year in which the settlor’s spouse dies or in which the settlor and spouse cease to be married.

12. Paragraph 8 explains what is meant by the reference in paragraph 4(1) to the deemed disposal being a disposal of "the relevant underlying assets". In the straightforward case where the interest which triggers the disposal is an interest in the whole of the settled property, the disposal is of the whole or part of each of the assets comprised in the settled property. If, however, the interest is an interest in a defined part of the settled property, the disposal is of the whole or part of each of the assets comprised in that defined part. In either case, the whole of each asset concerned is disposed of unless the interest is an interest in a specific fraction or amount of the income or capital of the property in question, in which case a corresponding part of each of those assets is disposed of. Where there is a period between the beginning of the disposal of the interest and its effective completion, paragraph 13(4)(a) provides for the deemed disposal to relate to every asset comprised in the settled property, or the defined part in question, at any time during the period. This does not apply, however, to any asset which the trustees dispose of under a bargain at arm’s length during the period provided that they do not reacquire it during the period.

13. Paragraph 9 provides that the deemed disposal is treated as made under a bargain at arm’s length for a consideration equal to the whole, or a corresponding part, of the market value of each of the assets in question. Where there is a period between the beginning of the disposal of the interest and its effective completion, paragraph 13(4)(b) provides, in the case of each asset, for its highest market value during the period to be used for this purpose. Gifts holdover relief under section 165 or 260 TCGA cannot be claimed in respect of the deemed disposal because its availability is restricted to non-arm’s length disposals.

14. Paragraph 10 prevents a double tax charge arising where the disposal of the interest is not exempt from capital gains tax (or corporation tax on chargeable gains) by virtue of section 76(1) TCGA, and the disposal triggers a deemed disposal under Schedule 4A. Its effect, broadly, is to maximise the net chargeable gain or, if there is no net gain, minimise the net allowable loss by securing that the provision which would maximise the gain or, as the case may be, minimise the loss has effect and that the other does not.

15. Paragraph 11 provides for the tax paid in respect of the deemed disposal to be recoverable by the trustees from the person who disposed of it.

16. Paragraph 12 provides the meaning of "settlor" which applies for the purposes of the Schedule — it is essentially the same as that used for the purposes of sections 77 to 79 TCGA

17. Paragraph 13 contains the special rules which apply where there is a period between the beginning of a disposal (as defined in sub-paragraph (2)(a)) and its effective completion (as defined in sub-paragraph (2)(b)). As described earlier in this note, sub-paragraph (3) makes a number of modifications to the three conditions referred to in paragraph 4(1) in cases where the beginning of the disposal and its effective completion occur in different tax years, and sub-paragraph (4) modifies the rules in paragraphs 8 and 9.

18. Paragraph 14 provides for Schedule 4A not to apply where an election has been made for income of the settlement to be applied for the maintenance of historic buildings.

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19. Any gains arising on the disposal of an interest in (as opposed to the underlying assets of) a UK trust are not generally chargeable to CGT. The purpose of the exemption is to prevent a double tax charge — one on the sale by the trustees of assets in the trust property and the other on the sale by a beneficiary of an interest in the trust. This exemption is being exploited by individuals who place assets (which are standing at a gain) in trusts in which they retain an interest that is subsequently sold to someone else. They are effectively using the CGT exemption to sell the underlying assets tax-free to third parties.

20. The exemption is also being exploited in schemes designed to circumvent the measure introduced by section 75 Finance Act 1999 to prevent the sale of trust losses. These schemes work in the following way. Valuable assets are placed in trust, a contingent interest in the settled property is created in favour of the settlor, entitling him or her to acquire the trust property after a short period of time. That interest is then sold to the trustees of another trust which has unused losses. The trustees of the second trust subsequently acquire the assets from the first trust, using gifts holdover relief. The assets are then sold by the trustees of the second trust who offset the losses against the gains.

21. The provisions introduced by Clause 90 and Schedule 24 are designed to counter these tax avoidance devices. Broadly, where an interest in a settlement in which the settlor has an interest is disposed of for consideration, the assets to which the interest relates are deemed to be disposed of and reacquired by the trustees at their market value. Any resulting gains will be chargeable on the settlor under the normal provisions. Gifts holdover relief cannot be claimed to relieve the gains arising on the disposal.

22. This rule will also apply to any property which formed part of a settlement in which the settlor had an interest at any time in the two previous tax years, or at any time in the period beginning when the contract for the sale of the interest is entered into and ending when the transaction is effectively completed. There are also rules to prevent the tax charge being avoided on property added to the trust during that period. The amount of tax paid under the new rule will be recoverable from the person who sells the interest.

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