Capital Gains Tax and Trusts

The trustees of a UK resident trust are subject to Capital Gains Tax (CGT).

  • The creation of a trust is treated as a disposal of the assets at market value by the settlor, even if the settlor is a trustee or retains an interest as a beneficiary. The settlor may, therefore, have a personal CGT liability on creating the trust.
  • If a trust has at least one trustee who is resident in the UK, this generally means there is potentially a liability to CGT.
  • Trusts have an annual exempt amount which is equal to half the individual exempt amount. For 2014/15, the individual exempt amount is £11.000, so the trust exempt amount is £5,500.
  • Trustees are taxed on chargeable gains made by a trust, unless it is a bare trust or a trust for vulnerable beneficiaries. Any chargeable gains incurred by a bare trust are generally treated as those of the beneficiary, and any CGT tax is the beneficiary’s liability.

Capital Gains Tax, Income Tax and Inheritance Tax

  • Inheritance Tax can arise during lifetime where a gift is made that is a chargeable lifetime transfer. The most common example of a chargeable lifetime transfer is a gift into a trust.
  • When a gift is made into a trust, this is a disposal for CGT purposes and a chargeable lifetime transfer for Inheritance Tax purposes.
  • Value for GGT is value of the asset; value fur Inheritance Tax is less to the estate.
  • The valuation basis of a gift is its market value.

Capital Gains Tax Annual Exemptions

The current CGT annual exemption is £11,000 and it must be used in the year in which any gains arise.  It cannot be carried forward if it has not been used in a tax year and is, therefore, important to consider using the exempt amount each year by making disposals.

Capital Gains Tax Not At Arms Length

Any disposal between individuals with a close connection, such as close relatives, is a disposal not at arm’s length.  Where this is the case, the market value is used for capital gains calculations instead of the actual proceeds. This applies to both sales and gifts.

Market value can also be used instead of the actual sale price in disposals between unconnected parties, e.g. on a deliberate sale at an under value, or a gift between friends.

Wasting Assets

Wasting assets have estimated useful life of no more than fifty years from when it was first acquired. They are free of CGT but this exemption does not apply to plant and machinery used in a business where capital allowances have been claimed.

Motor cars are always exempt regardless of business use.