1. This clause provides for a restriction on the set off of losses against capital gains arising on the disposal by trustees of assets transferred to them where gains arising on the transfer have been deferred under a claim for gifts relief. The restriction applies where the transferor of the asset or any connected person has purchased an interest in the trust or entered into any arrangement to purchase such an interest.

2. The rules take effect for trust gains arising on or after 21 March 2000.

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3. Subsection (1) inserts a new section, section 79A, into the Taxation of Chargeable Gains Act 1992.

 

4. Section 79A(1) sets out the circumstances under which the restriction on the set-off of losses is to apply -

• the gain arising to trustees against which losses are not to be allowed must include an amount that has been deferred as a consequence of a gifts relief claim on the transfer of an asset to the trust. (The asset being disposed of need not necessarily be the same asset that was transferred).

• the transferor of the asset, or connected person, must have acquired an interest in the trust for consideration, or consideration must have been received by any person in connection with the acquisition.

6. Section 79A(3) and (4) define and clarify terms used in the section.

7. Subsection (2) provides for the restriction to apply to gains arising on or after 21 March 2000.

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8. Under current rules, capital losses accruing to trustees can be used to offset their capital gains. Following changes made in section 75 Finance Act 1999, trust losses can be used to offset gains arising outside the trust only in very limited circumstances. Schemes have been developed to circumvent these rules by enabling individuals with large potential capital gains to buy their way into trusts with actual or potential losses. The purpose of the schemes is to avoid tax by transferring the relevant assets into the trust using gifts hold-over relief so that the trust losses can then be used to offset the gains arising on the subsequent disposal of the assets so that no tax is paid. Very large amounts of tax could be lost if these schemes were to succeed.

9. To counter these schemes, this clause prevents losses accruing to trustees being set against gains on assets that have been transferred into the trust using gifts hold-over relief where the transferor or a connected person has acquired an interest in the trust and any consideration has passed in connection with the acquisition.

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