There will be a crackdown on avoidance of capital gains tax by individuals exploiting the tax rules for trusts, announced the Chancellor today. The measures proposed will
– apply a charge when certain interests in trusts are sold;
– stop trust losses being offset against gains of people who have bought their way into a trust;
– apply a charge when trustees incur debt and advance funds from the trust as part of a scheme to avoid capital gains tax;
– prevent tax avoidance effected by bringing an offshore trust onshore and taking it offshore again;
– make effective the current anti-avoidance legislation where gains are sheltered through the double tier of a trust and an offshore company.

This package of measures complements action announced by the Chancellor in his Pre-Budget Report to stop capital gains gifts relief being used for tax avoidance. All the measures announced today will take effect from today.


1. This package of measures is designed to prevent avoidance of capital gains tax (CGT) by individuals on the sale of valuable assets using a variety of sophisticated tax avoidance schemes which exploit the tax rules for trusts.

Sale of an interest in a trust

2. Any gains arising on the disposal of an interest in (as opposed to the underlying trust assets of) a UK trust are not generally chargeable to CGT. The purpose of the exemption is to prevent a double tax charge – on both the sale by the trustees of trust property and by a beneficiary of an interest in the trust. This exemption is being exploited by individuals placing assets in trusts in which they retain an interest and then selling their interest in the trust. They are effectively using the exemption to sell assets tax-free to third parties.

3. From today, 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 will be 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 hold-over relief will not be available on the gains arising on this disposal.

4. 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. There will be rules to stop the tax charge being avoided on property added to the trust after the contract for the sale of the interest has been entered into but before the transaction is complete. The amount of tax payable by the trustees under the new rule will be recoverable from the person who sells the interest.

Use of trust losses

5. Under the current rules, capital losses accruing to trustees can be used to offset their capital gains. Following changes made in last year’s Finance Act, 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 idea is that the individuals transfer the assets in question into the trust using gifts hold-over relief and then use the losses 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.

6. To counter these schemes, losses accruing to trustees will no longer be available to offset gains on assets which 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. The new rule takes effect for any gains accruing to trustees on or after today.

Trustees in debt

7. The third element in the package is designed to counter an avoidance device which has become commonly known as a ‘flip flop’. This is a device for extracting gains from a trust tax-free or with a significant tax saving. At its simplest, the trustees of a trust in which a UK resident settlor has an interest (so that the settlor is charged in respect of trust gains) borrow money on the security of assets in the trust and advance the money to another trust. The settlor then severs his interest in the first trust. In the following tax year the trustees sell the assets and use the proceeds to repay the debt. The settlor receives his money from the second trust. If successful, the outcome of the device is that in the case of an offshore trust no tax is paid by the settlor. In the case of a UK trust there is a 6% tax rate saving for the higher rate taxpayer. The device can also be used to eliminate entirely the CGT liabilities of UK beneficiaries of offshore trusts who receive capital payments from trustees.

8. From today, where trustees, at a time when they are in debt, transfer funds to another person (whether by transferring or lending property) and any borrowed money has not been wholly used for normal trust purposes, the trustees will be treated as making a disposal and reacquisition of settled property. They will be deemed to dispose of the whole (or, where the amount transferred is less than the value of the chargeable assets remaining in the trust, an appropriate fraction) of those remaining assets at the time of the advance, and immediately reacquiring them at market value Gifts hold-over relief will not be available on the gains arising on this disposal.

9. There will be no deemed disposal and reacquisition if borrowed money has been wholly used for normal trust purposes, namely –
– expenditure on any ordinary trust assets (or ordinary trust assets representing those assets) that are still held by the trustees after the transfer of value is made;
– the repayment of any debt where the money borrowed has been wholly (or substantially wholly) used for normal trust purposes; and
– the meeting of the trustees’ bona fide current expenses in administering the trust or any of the settled property.

10. For this purpose, ‘ordinary trust assets’ are shares, securities, tangible property (whether movable or immovable), and any property used for the purposes of a trade, profession or vocation carried on by the trustees or any beneficiary with an interest in possession in the settled property.

11. The new provisions will apply to all trusts except UK trusts in which the settlor does not have an interest. A UK resident settlor will be charged in respect of the resulting gains where existing rules provide for it. Where the resulting gains accrue to offshore trustees and an amount equal to those gains is not charged on a UK resident settlor, additional rules will be provided to ensure that UK resident beneficiaries who receive capital payments are charged in respect of the gains, irrespective of the source of the payments. For this purpose, a separate pool of gains will be created which will be drawn on where any transferor or transferee trust’s normal trust gains have been exhausted.

12. These new rules will apply to transfers of value by trustees on or after today.

Beneficial interests in migrating trusts

13. Special capital gains tax rules apply to resident trusts which become non resident. At the time of emigration there is
– a tax charge on unrealised gains;
– an uplift to market value of beneficiaries’ interests in the trust.

14. The purpose of the uplift is to prevent a potential double charge – on any increase in value prior to the trustees’ migration of both the trust property (which is charged on exit) and of a beneficiary’s interest in that property (which is charged if the beneficiary later sells the interest).

15. These rules are being exploited by offshore trusts. Having realised gains which have not been charged to tax on either the settlor or beneficiaries of the trust (‘stockpiled gains’), the trusts are brought onshore and then taken offshore again. The gains on the trust property escape a tax charge because they were realised while the trust was offshore. The beneficiary pays little or no tax on the sale of an interest in the trust because of the rule providing for its value to be uplifted on the trust’s exit from the UK. There will be no uplift in the value of any beneficial interest in a trust where, on or after today, the trustees become non-resident at a time when there are ‘stockpiled gains’ in the trust, or the trust is a ‘transferor or transferee trust’ which, under the change outlined at paragraph 11 above, is required to draw on a separate amount of gains. There will be no change in the rules for emigrating trusts which do not have ‘stockpiled gains’ or which are not ‘transferor or transferee trusts’.

Trustees participating in offshore companies

16. Special tax rules to combat tax avoidance apply where a UK resident is a participator in an offshore company which is a close company (a company under the control of five or fewer participators). Broadly, where such a company sells an asset (which is not tangible property used in a trade) at a gain, the gain is attributed to participators in proportion to their interest in the company.

17. These rules are being circumvented where assets are held in an offshore company owned by a trust – usually an offshore trust – rather than held directly by the trust. If the company is resident in a country with which the UK has a tax treaty and the treaty provides for gains arising to residents of the other country to be exempt from UK tax, the UK resident settlor or beneficiaries (or trustees if resident) of the trust cannot under present rules be charged on the gains of the offshore company. In many cases, to take advantage of the exemption, valuable assets are being shifted by trustees from tax havens to countries with which the UK has a tax treaty just prior to the sale taking place. This is an abuse of the tax treaty arrangements, which were never intended to facilitate tax avoidance.

18. Legislation will be introduced to prevent this abuse by ensuring that tax treaties do not prevent gains of offshore companies being attributed to resident or non-resident trustees as participators of those companies. The new rules will apply to gains accruing on or after today.


1. This package of measure is designed to deal with some very complex transactions involving trusts which are being entered into by individuals to avoid paying CGT. The yield from the package, including the measure announced in the Pre-Budget Report, is estimated to be 200 million pounds per annum. The package is also expected to protect a further 300 million pounds of tax revenue.

2. The measure to tackle avoidance of CGT announced by the Chancellor in his Pre-Budget Report was the withdrawal from 9 November 1999 of business assets gifts relief on the transfer of shares or securities to companies. This relief was primarily being used to facilitate tax avoidance rather than for any genuine commercial purpose. The measure is detailed in an Inland Revenue Press Release IR2 of 9 November – Capital Gains Tax – Countering Avoidance.

The draft legislation was published in a further Press Release on 21 January 2000.

Related reading