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TCGA92/Sch4B/para12

Determining how much of the value of an asset is attributable to trustee borrowing is required for two reasons:

• if a transfer of value is the transfer of an asset the amount of value transferred is not reduced by any consideration received for the asset, TCGA92/Sch4B/para2(4)(a)
• the effective value of the remaining chargeable assets is reduced by the amount of that value that is attributable to trustee borrowing, TCGA92/Sch4B/para11(5).

»Ê¹ÚÌåÓýapp following simple example illustrates why these rules are needed.

Example

»Ê¹ÚÌåÓýapp trustees have chargeable assets value £250,000. »Ê¹ÚÌåÓýapp gain on those assets is also £250,000. »Ê¹ÚÌåÓýapp trustees borrow £750,000. »Ê¹ÚÌåÓýappy use £500,000 to buy chargeable securities. This is an application of the borrowing for normal trust purposes. »Ê¹ÚÌåÓýapp trustees transfer the remaining £250,000 to a new settlement. Without reducing the effective value of the remaining chargeable assets by the amount attributable to trustee borrowing the fraction in TCGA92/Sch4B/para11 is 250,000(VT)/750,000(EV) = 1/3. »Ê¹ÚÌåÓýapp gain of £250,000 would be reduced to £83,000.

»Ê¹ÚÌåÓýapp reality is that the securities haven’t changed in value since they were acquired. »Ê¹ÚÌåÓýappy will not accrue a gain when they are sold together with the original trust assets to repay the borrowing. Reducing the effective value of the remaining chargeable assets by the amount attributable to trustee borrowing ensures the full amount of the gain on the original trust assets is charged.