Capital gains tax issues with trusts

Not a day goes by, literally, where I don't look at trusts. Yes although Family Investment Companies have become extremely popular over the last few years for multiple reasons I shall outline another time, trusts are still rife in practice.

Whether families are setting up trusts now (most commonly I deal with discretionary trusts) or looking at trusts set up over a decade ago, they still play a key role in both bloodline and inheritance tax planning.

However, as all things tax, care must be taken, tax implications must be considered and ultimately, professional advice must be sought. That's where we come in to assist.

Saying that, I recently encountered a few cases where the capital gains tax (CGT) angle had to be delved into - hence the below for your 'leisure' and educational reading.

CGT when gifting assets INTO trust

Assets transferred into a trust during one's lifetime, excluding cash gifts or the assignment of investment bonds, will constitute a disposal for Capital Gains Tax (CGT) purposes.

Unless the settlor chooses to defer the gain through an election commonly known as 'holdover relief', they will be responsible for any gains arising. This is effectively market value at point of transfer less base cost. Just as if it's a normal disposal to anyone (or entity).

Holdover relief postpones the gain's taxation until the trustees sell the assets or transfer them to a beneficiary. Holdover relief is usually available because transferring assets to a trust also triggers an Inheritance Tax (IHT) chargeable lifetime transfer. For those in the know, I'm talking about s.260 TCGA 1992.

However, holdover relief is not an option for trusts where the settlor, their spouse/civil partner, or their minor child can benefit (referred to as 'settlor interested' trusts - DEFINITELY a topic for another day as typing this at 02:02am LOL). ??

Assets transferred to a trust upon the settlor's death are typically not subject to CGT. The trustees benefit by acquiring these assets at their market value at the date of death.

During the life of the trust

During the trust's existence, if trustees sell trust assets (for example stocks or property), gains are computed similarly to individuals and taxed at CGT trust rates (20% or 28% for residential property). Trustees are entitled to half the individual annual CGT exempt amount, shared equally between trusts created by the same settlor, with a minimum of one fifth of the trust exemption.

Trustees can also seek Principal Private Residence (PPR) relief on the sale of residential property occupied by a beneficiary as their primary residence.

Transferring assets OUT of a trust

Transfers out of a trust triggers a CGT disposal if trustees transfer chargeable assets to a beneficiary, such as making a discretionary capital payment.

Trustees and the relevant beneficiary can jointly elect to defer the gain until the beneficiary disposes of the asset (except upon death). This deferral is possible even for settlor interested trusts, offering potential advantages as the beneficiary enjoys the full annual exemption and may face a lower CGT rate. Therefore, capital gains tax can be deferred both upon entering (unless settlor interested as I noted above) and exiting discretionary trusts utilising beneficial tax reliefs.

To utilise holdover relief, trustees must avoid transferring assets to a beneficiary within the first three months of establishing the trust or within three months following a 10-yearly IHT charge. Holdover relief is not applicable in such circumstances unless the transfer involves business assets.

Final 2am comments

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Hope you found my content insightful.

Omar

PS I feel like I should experiment more with late night writing. I seem to be getting into flow and most importantly, typing how I would speak...