Taxation Readers’ forum: Anomaly? Annual exemption on non-resident trust gains

Writing for Taxation magazine’s Readers’ Forum, BKL tax consultant Terry Jordan answers a reader’s query about annual exemption on non-resident trust gains. Terry explains how non-UK resident trusts are excluded from the fragmentation provisions.

‘I deal with the compliance for a number of non-resident trusts. FA 2019 has extended the capital gains tax charge on non-residents (including trusts) to all interests in UK land. When capital gains tax applies to non-residents, they are entitled to claim the annual exemption (TCGA 1992, s 1K). This can also be claimed by trustees – half value in most cases, full value for disabled trusts.

However, what is confusing me is the special rule for the annual exemption for trusts. I’ve always understood that if more than one trust is created by the same settlor, the annual exemption is divided between them (TCGA 1992, Sch 1c para 6) and I expected that this rule would also apply when the trusts are non-resident. But as far as I can see this is not the case. The rules for splitting the annual exemption only apply if there is a ‘qualifying UK settlement comprised in a group’ and the definition of a qualifying UK settlement in Sch 1c para 7 makes it clear that the definition only applies to trusts when the trustees are UK resident for all of part of the year.

The anomaly seems odd or have I missed something which has the effect of splitting the exemption?’ Query 19,499 – Trust Adviser.

Terry Jordan’s reply: non-UK resident trusts are excluded from the fragmentation provisions

‘The query relates to the capital gains tax annual exemption which is available to non-UK resident trusts. Historically, as non-residents, offshore trustees were outside the scope of capital gains tax. Their gains were, in simple terms, either attributed to the settlor of the trust or ‘stockpiled’, potentially to be matched with ‘capital payments’ received by UK resident beneficiaries. These trusts were brought within the scope of capital gains tax on UK residential property from 6 April 2015 and in respect of other UK real and leasehold property from 6 April 2019.

As Trust Adviser is aware, individuals enjoy an annual exemption from capital gains tax of £12,000 for the current 2019-20 tax year and trustees, at best, have one-half of the individual exemption except for trusts with a vulnerable beneficiary when the full exemption may be available.

At this point, the writer assumes that if there were no annual exemption the self-assessment system would grind to a halt if all gains however small gave rise to a liability.

Until TCGA 1992, s 77 was abolished from 6 April 2008, gains of settlor-interested UK trusts were attributed to the settlor. Far from representing a relaxation in the rules, it is more likely that abolition stopped the settlors using their own (usually higher than the trustees’) exemptions against the attributed gains.

For UK resident trusts, the annual exemption is divided between all the trusts created by the same settlor since 6 June 1978 with a minimum of one-tenth of an individual’s exemption for the relevant tax year. In the past, the writer has suggested that ‘pilot’ settlements that are no longer needed should be brought to an end to prevent fragmentation of the exemption. (There is a similar provision for income tax purposes dividing the starting band for trustees of discretionary and accumulation trusts who are liable to the trust rate.)

As Trust Adviser has identified, the effect of TCGA 1992, Sch 1C para 7 is to exclude non-UK resident trusts from the fragmentation provisions. The writer assumes that HMRC was relaxed on the setting up and running costs of such trusts deterring the creation of multiple settlements.’

The article is also available on the Taxation website.

For more information about trusts and their tax implications, please get in touch with your usual BKL contact or use our enquiry form.



Sam Inkersole

In 2022, Sam won the Taxation’s Rising Star award at the Taxation Awards in and was named in the Accountancy Age 35 Under 35.

Jon Wedge

While Jon’s client work focuses on the financial services sector, he also oversees the firm’s assurance service, as well as supporting the trainees following in his footsteps.


Elana joined us in 2017 as an ACA trainee, after graduating from Durham University where she had studied languages. She is now a manager in our assurance team.


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