The Treasury announced on 16 June that legislation will be contained in this year²s Finance Act to restrict the circumstances in which beneficiaries can take the benefit of unused trust losses.
There has for some time been a thriving business involving the sale of trust losses to people who have realised capital gains. These losses have very often come out of trusts which have manufactured huge artificial losses by the use of matching transactions, one of which would produce a large profit in circumstances where the profit is not taxable and the other of which produces a large loss. It is these sort of circumstances that the rules are designed to deal with. However, they go much further.
Previously, a beneficiary who received a distribution from a UK trust could take the benefit of any allowable losses which had accrued to the trustee in relation to the property transferred to the beneficiary or any property which is represented by the assets transferred to the beneficiary. This included past losses as well as losses which arise on the deemed disposal of the assets which are being distributed.
If the trust was being terminated and all of the assets distributed to a single beneficiary, that beneficiary would therefore take the benefit of all unused losses of the trustees.
The old rules probably did not apply to losses realised by offshore trustees. Where there were significant unrealised losses, it had therefore been usual practice to appoint UK resident trustees before distributing the trust assets to the beneficiary.
The rules are being changed in respect of any distribution made on or after 16 June 1999 as follows:
- The beneficiary will not get the benefit of past losses in any circumstances. Any surplus losses realised by the trustees will therefore be wasted.
- The beneficiary will get the benefit of any loss which arises on the deemed disposal of an asset which is distributed to him but only to the extent that the loss cannot be used by the trustees. The trustees are required to set the loss which would otherwise be transferred to the beneficiary against their gains before deducting any other losses they may have.
- The beneficiary can only set the loss against a subsequent gain on the asset which is distributed to him (or where the asset he receives is an interest in land, any other asset deriving from that land).
As can be seen, the rules are now very restrictive indeed. There will be very few circumstances where the loss is of any use to the beneficiary.
Bearing in mind the mischief which the legislation is designed to prevent, it is clear that the new provisions are much wider than is necessary. We will therefore be making representations to restrict the scope of the new legislation so that it deals only with the abuse which has been identified - ie: the sale of trust losses. However, given the Treasury's attitude to representations on other matters affecting trusts, it would not be surprising if the legislation is enacted in its proposed form.
This note is intended to provide general information about a recent development which may be of interest. It is not intended to be comprehensive nor to provide any specific legal advice and should not be acted or relied upon as doing so. Professional advice appropriate to the specific situation should always be obtained. If you would like further information or specific advice please contact Robin Vos at Macfarlanes' London office.
