Taxation of Chargeable Gains Act 1992 c. 12, s. 13 (nonresident companies)

Taxation of Chargeable Gains Act 1992 c. 12
Part I CAPITAL GAINS TAX AND CORPORATION TAX ON CHARGEABLE GAINS
Residence etc.
This version in force from: July 21, 2008 to present
13.— Attribution of gains to members of non-resident companies.
(1) This section applies as respects chargeable gains accruing to a company—
(a) which is not resident in the United Kingdom, and
(b) which would be a close company if it were resident in the United Kingdom.
(2) Subject to this section, every person who at the time when the chargeable gain accrues to the company is resident or ordinarily resident in the United Kingdom[ and]1 is a participator in the company, shall be treated for the purposes of this Act as if a part of the chargeable gain had accrued to him.
(3) That part shall be equal to the proportion of the gain that corresponds to the extent of the participator's interest as a participator in the company.
(4) Subsection (2) above shall not apply in the case of any participator in the company to which the gain accrues where the aggregate amount falling under that subsection to be apportioned to him and to persons connected with him does not exceed one tenth of the gain.
(5) This section shall not apply in relation to—
(b) a chargeable gain accruing on the disposal of an asset used, and used only–
(i) for the purposes of a trade carried on by the company wholly outside the United Kingdom, or
(ii) for the purposes of the part carried on outside the United Kingdom of a trade carried on by the company partly within and partly outside the United Kingdom,.
(c) a chargeable gain accruing on the disposal of currency or of a debt within section 252(1), where the currency or debt is or represents money in use for the purposes of a trade carried on by the company wholly outside the United Kingdom, or
(d) to a chargeable gain in respect of which the company is chargeable to tax by virtue of section 10B2.
(5A) Where–
(a) an amount of tax is paid by a person in pursuance of subsection (2) above, and
(b) an amount in respect of the chargeable gain is distributed (either by way of dividend or distribution of capital or on the dissolution of the company) before the end of the period specified in subsection (5B) below,
the amount of tax (so far as neither reimbursed by the company nor applied as a deduction under subsection (7) below) shall be applied for reducing or extinguishing any liability of that person to income tax, capital gains tax or corporation tax in respect of the distribution.
(5B) The period referred to in subsection (5A)(b) above is the period of three years from–
(a) the end of the period of account of the company in which the chargeable gain accrued, or
(b) the end of the period of twelve months beginning with the date on which the chargeable gain accrued,
whichever is earlier.
(7) The amount of capital gains tax paid by a person in pursuance of subsection (2) above (so far as neither reimbursed by the company nor applied under subsection (5A) above for reducing any liability to tax) shall be allowable as a deduction in the computation under this Act of a gain accruing on the disposal by him of any asset representing his interest as a participator in the company.
(7A) In ascertaining for the purposes of subsection (5A) or (7) above the amount of capital gains tax or income tax chargeable on any person for any year on or in respect of any chargeable gain or distribution—
(a) any such distribution as is mentioned in subsection (5A)(b) above and falls to be treated as income of that person for that year shall be regarded as forming the highest part of the income on which he is chargeable to tax for the year.
(8) So far as it would go to reduce or extinguish chargeable gains accruing by virtue of this section to a person in a year of assessment this section shall apply in relation to a loss accruing to the company on the disposal of an asset in that year of assessment as it would apply if a gain instead of a loss had accrued to the company on the disposal, but shall only so apply in relation to that person; and subject to the preceding provisions of this subsection this section shall not apply in relation to a loss accruing to the company.
(9) If a person who is a participator in the company at the time when the chargeable gain accrues to the company is itself a company which is not resident in the United Kingdom but which would be a close company if it were resident in the United Kingdom, an amount equal to the amount apportioned under subsection (3) above out of the chargeable gain to the participating company's interest as a participator in the company to which the gain accrues shall be further apportioned among the participators in the participating company according to the extent of their respective interests as participators, and subsection (2) above shall apply to them accordingly in relation to the amounts further apportioned, and so on through any number of companies.
(10) The persons treated by this section as if a part of a chargeable gain accruing to a company had accrued to them shall include the trustees of a settlement who are participators in the company, or in any company amongst the participators in which the gain is apportioned under subsection (9) above, if when the gain accrues to the company the trustees are neither resident nor ordinarily resident in the United Kingdom.
(10B) A chargeable gain that would be treated as accruing to a person under subsection (2) above shall not be so treated if–
(a) it would be so treated only if assets that are assets of a pension scheme were taken into account in ascertaining that person's interest as a participator in the company, and
(b) at the time the gain accrues a gain arising on a disposal of those assets would be exempt from tax by virtue of section 271(1)(c) or (1A).
In paragraph (a) above “assets of a pension scheme” means assets held for the purposes of a fund or scheme to which any of the provisions mentioned in paragraph (b) above applies.
(11) If any tax payable by any person by virtue of subsection (2) above is paid by the company to which the chargeable gain accrues, or in a case under subsection (9) above is paid by any such other company, the amount so paid shall not for the purposes of income tax, capital gains tax or corporation tax be regarded as a payment to the person by whom the tax was originally payable.
(11A) For the purposes of this section the amount of the gain or loss accruing at any time to a company that is not resident in the United Kingdom shall be computed (where it is not the case) as if that company were within the charge to corporation tax on capital gains.
(12) In this section `participator', in relation to a company, has the same meaning given by section 417(1), of the Taxes Act for the purposes of Part XI of that Act (close companies).
(13) In this section—
(a) references to a person's interest as a participator in a company are references to the interest in the company which is represented by all the factors by reference to which he falls to be treated as such a participator; and
(b) references to the extent of such an interest are references to the proportion of the interests as participators of all the participators in the company (including any who are not resident or ordinarily resident in the United Kingdom) which on a just and reasonable apportionment is represented by that interest.
(14) For the purposes of this section, where—
(a) the interest of any person in a company is wholly or partly represented by an interest which he has under any settlement (`his beneficial interest'), and
(b) his beneficial interest is the factor, or one of the factors, by reference to which that person would be treated (apart from this subsection) as having an interest as a participator in that company,
the interest as a participator in that company which would be that person's shall be deemed, to the extent that it is represented by his beneficial interest, to be an interest of the trustees of the settlement (and not of that person), and references in this section, in relation to a company, to a participator shall be construed accordingly.
(15) Any appeal under section 31 of the Management Act involving any question as to the extent for the purposes of this section of a person's interest as a participator in a company shall be to the Special Commissioners.
1. words substituted by Finance Act 2008 c. 9 Sch. 7(2) para. 103
2. In respect of the application of this section to an overseas life insurance company, section 13(5)(d) shall read as:
(d) to a chargeable gain in respect of which the company is chargeable to tax by virtue of section 11(2)(b), (c), (d) or (e) of the Taxes Act.
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CURRENT CAPITAL GAINS TAX PLANNING OPTIONS:
A LECTURE DELIVERED TO PANNELL KERR FOSTER
8th February 2008
Simon McKie MA (Oxon), Barrister, FCA, CTA (Fellow), APFS, TEP
http://tinyurl.com/68o646 pp. 17-25
SECTION V
OFFSHORE TRUSTS AND COMPANIES
OFFSHORE COMPANIES
5.1.1 As, I am sure, Philip Dearden will explain in more detail later, the attribution of the gains of non-resident companies under s.13 to participators in those companies is extended to participators who are not domiciled in the United Kingdom. Previously, gains were only attributed under that section to participators who were resident or ordinarily resident and domiciled in the United Kingdom.
5.1.2 A new s.14A applies where:-
(a) By virtue of s.13 part of a chargeable gain that accrues to a company on the disposal of an asset is treated as accruing to an individual in a tax year; and (b) The individual is not domiciled in the United Kingdom in that year.
5.1.3 Where those conditions are satisfied the part of the chargeable gain treated as accruing to the individual is a foreign chargeable gain and can therefore be taxable on the remittance basis. For the purposes of the new remittance rules any consideration obtained by the company on the disposal of the asset is treated as deriving from the deemed chargeable gain and if the consideration so obtained is not equal to the market value of the asset, the asset is to be treated as deriving from the deemed chargeable gains.
5.1.4 So these provisions aim to reproduce the effect of the new remittance basis rules in relation to the gains of non-resident companies.
5.1.5 Although this may be bad news for non-domicillaries, s.13 companies could continue to be useful investment holding vehicles for those who have either not opted for the remittance basis or, alternatively, have done so but will remit significant capital gains. That is because the gains of non-resident companies are calculated under Corporation Tax rules which will give an allowance for indexation but the rate of tax applicable to those gains will be the individual’s rate of eighteen per cent. Thus, holding investments through a non-resident company neatly combines Corporation Tax Indexation Relief with the individual’s rate of Capital Gains Tax.
5.1.6 As we shall see, this advantage does not depend upon the participator being a non-domiciliary. It applies as well to UK domicillaries. The advantage also applies where gains arise within a non-resident company held in an offshore trust.
5.1.7 Where gains are treated under s.13 as accruing to an individual who is not domiciled in the United Kingdom there are two restrictions on reliefs which would otherwise be provided by s.13. Section 13(8) allows losses arising in a non-resident company to be apportioned to participators for the purposes of reducing gains allocated under s.13 in respect of the same fiscal year. Where, however, a gain becomes chargeable by virtue of being remitted in a year later than the year in which it arises, losses arising in the offshore company in the year of remittance cannot be set off. Nor will any losses arising in the year of the disposal to be set off in determining the amount of the gain. That is because s.13(8) works not by setting the loss off against the gains of the company in determining the amount of a gain which is allocated to the individual, but rather by allocating the loss to the individual as well as the gain and allowing the set off at the level of the individual.
5.1.8 TCGA 1992 s.12(2) deems chargeable gains in respect of foreign chargeable gains where the remittance basis applies to accrue at the time of remittance and not at the time of the disposal which gives rise to them.3
5.1.9 That is a very significant disadvantage in comparing the effects of the application of the remittance basis with being taxed on an arising basis. It shows, that a decision to make the remittance election will never be a simple one and will require detailed predictions of future events to be made.
5.1.10 The second disadvantage under s.13 applies where the participator is not c domiciled in the United Kingdom even if he is fully taxable on an arising basis. Were it not for the provisions of ss.13(5) and 13(7) the s.13 charge would lead to double taxation; a charge on the attribution of the gain to the participator and a charge on the participator when he disposes of the shares in the offshore company. That of course mirrors the situation of a UK resident holding assets through a UK resident company but at the time that s.13 was enacted it was
3 At least, that seems to be the intention of the legislation, although read literally it actually seems to give rise to a double charge thought inappropriate. Section 13(5), as subsequently amended, provides a credit for the tax suffered under s. 13 against the UK tax charged on a subsequent distribution in respect of the capital gain made within three years of the end of the period in which the gain is made.
5.1.11 To the extent that the tax has not been credited in this way, s. 13(7) allows the tax to be treated as a deduction in the computation of a gain accruing on the disposal by the participator of any asset representing his interest in the company.
5.1.12 Section 13(5A) can apply to gains allocated under s.13 to non- domiciliaries but s.13(7) can not. It is difficult to understand why it should not but it is particularly outrageous that it should not apply to a non-domiciliary fully taxable on the arising basis.
OFFSHORE TRUSTS
5.2.1 The offshore settlor charge imposed by TCGA 1992 s.86 currently does not apply if the settlor is not domiciled in a country of the United Kingdom in the fiscal year concerned. As from next year, that exclusion will no longer exist. Similarly, under the capital payments charge imposed by TCGA 1992 s.87 a beneficiary is excluded from the charge to tax on gains treated as accruing to him under the provisions of that charge if he is not UK domiciled. That exclusion is also removed with effect from 2008/2009 onwards.
5.2.2 Where a settlor has elected for the remittance basis to apply, provisions exist to allow a form of the remittance basis to apply to gains attributed to settlors under s.86.
5.2.3 The net effect of all these rules and their interaction has been much criticised primarily because, events taking place on or after the 6th April 2008, can bring into charge gains realised many years ago. The reason for that is that s.87(7) which currently provides an exemption for non-domicillaries under the Capital Payments Charge does not operate by deeming gains not to accrue to a non- domiciliary but rather by providing that gains which do accrue to a non- domiciliary under s.87 should not be chargeable. Thus, capital payments made from the 6th April 2008 onwards can be matched with gains realised in previous years and lead to a charge, whereas if the capital payments had been made in a previous year the gains treated as accruing would not have led to a charge to tax.
5.2.4 The legislation also provides provisions which are aimed to prevent a charge arising on the same gain under both ss. 86 and 87 but they do not prevent charges under both sections arising by reference to the same capital payment.
5.2.5 These provisions are of the greatest complexity, particularly when you begin to take account of groups of companies held by trustees. It is highly likely that detailed arithmetical anomalies will continue to emerge over the coming months. But even now what are, at the least, odd results, are emerging.
5.2.6 I am sure that Phillip Dearden will be providing more detailed examples this afternoon but an example here might suffice.
5.2.7 Example
Mr A is not domiciled in the United Kingdom. He made an election for the remittance basis to apply in 2008/2009 and all succeeding years. He had settled a non-resident trust of which he was a beneficiary in 1999/2000 and the trustees had made a gain of £1,000,000 in that year. No other transactions took place until 2008/2009 when the trustees made a further gain on a foreign situs asset. In 2009/2010 the trustees made a capital advance of £1,000,000 to Mr A in the UK.
The gains realised in 1999/2000 were not treated as accruing under s. 86 but they were trust gains for the purposes of s.87.
An amount equal to the gains realised in 2008/2009 were deemed accrue to Mr A in that year under s.86. That amount of deemed chargeable gains were foreign chargeable gains and so, not having been remitted in 2008/2009, Mr A was not chargeable in respect of them.
The trust gains in that year would, under s.87(2), have included the gains of previous years of £2,000,000 (£1,000,000 – £1,000,000) exc ept that s.87(2) excluded the gain of 2008/2009 from being included in trust gains.
In that year, Schedule 5 para 5B would have added back an amount to the trust gains for 2008/2009 equal to the unremitted deemed chargeable gains.
In 2009/2010 the foreign chargeable gains which had been treated as accruing to him under s.86 were deemed to have been remitted by Mr A and so were chargeable on him.
For s.87 purposes, no addback was made to trust gains because the gains were remitted in that year. So trust gains in 2009/2010 were £1,000,000. The result was that the trust gains of £1,000,000 were matched with the advance in 2009/2010 which was a capital payment and gains of that amount accrued to Mr A under s.87.
So it is at least arguable that the interaction of ss.86 and 87 has not resulted in double taxation. The assessment under s.86 brought into charge in 2009/2010 the gain realised by the trustees in 2008/2009. The assessment under s.87 brought into charge in 2009/2010 the gain made by the trustees in 1999/2000. But it should be noted that a single payment of £1,000,000 has caused to be brought into charge gains of £2,000,000. This, in spite of the fact that some eight years had passed between the realisation of the first gain and the publication of the draft legislation which, when enacted, brought it into charge. What is more, the tax on the gain assessed under s.87 will be increased by the supplementary charge by sixty per cent because over six years has passed between its realisation and the capital payment of which it is matched.
The CIOT intends to say that it assumes that this cannot be HMRC’s intention but I think that it is highly unlikely that it is not. It should be noted, however, that if the trustees had accelerated the disposal in 2008/2009 and the advance in 2009/2010 to 2007/2008 the problem would largely have been avoided. The gain in 2007/2008 would not have been a gain within s.86 and although the advance to Mr A would have resulted in gains accruing to him under s.87 because of the exemption which currently exists in s.87(7) that gain would not have been chargeable. The situation would have been less favourable, had there been a transfer of value by trustees linked to a trustee borrowing within TCGA 1992 Schedule 4B.
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