Being appointed as a Trustee comes with a lot of responsibility. You have to consider the wishes of the settlor, the needs of the beneficiaries and the market conditions for investments, all while taking into account your obligations to HM Revenue & Customs. Trustees are often quite familiar with income tax as they are exposed to it in their personal financial dealings, but the lesser frequented Capital Gains Tax poses an important and often complex consideration for Trustees.
What is Capital Gains Tax?
Capital Gains Tax (CGT) is a taxation paid on any profit made when you dispose of an asset – that is selling, gifting, swapping or transferring an asset to another person, trust or company. ‘Profit’ is the key term here, as the tax is calculated on the difference between the asset’s value when you acquired it and the value when you dispose of it.
Certain assets are excluded from CGT consideration, such as a principal residence, cars, personal possessions up to £6,000, and stocks and shares held in a tax-free investment account such as an ISA. The disposal of any other asset is likely to give rise to a potential CGT liability.
How is it calculated?
First of all, it is important to establish the asset’s ‘base cost’. This is the value of the assets when acquired: often the sum that was paid for the asset, less any deductible costs of acquisition such as taxes or third-party fees. If an asset was inherited following the death of the original owner, the base cost will be the value of the asset as at the date of death.
Then consider the proceeds of disposal. Again, you may deduct certain costs associated with the disposal, but you are also entitled to deduct enhancement costs incurred on the asset during your ownership period.
The proceeds of sale (or value on disposal), minus the base cost represents the total gain (or loss as the case may be) for CGT purposes. There are a variety of reliefs available which can be considered before applying the appropriate rate of tax.
How does CGT relate to trust assets?
CGT can affect a trust at various stages:
- The transfer into the trust can trigger a charge to CGT for the person making the transfer to the trust. It may be possible to ‘hold over’ the gain when assets are transferred into a trust. This would defer the gain until the trust then sells or distributes the assets. Holdover relief is not available in all cases.
- When a trust makes a disposal of assets, CGT is calculated in the same way as it is for individuals – the difference between the acquisition cost and the disposal value. It is important that Trustees consider the type of trust they are administering. Bare trusts are charged to CGT as though the asset is owned directly by the beneficiary. Other types of trust attract different treatment, with some paying CGT at top rates. These are:
- 28% for gains relating to residential property and
- 20% for gains on other assets
Trustees do benefit from an annual tax-free allowance called the Annual Exempt Amount, although the amount of the AEA has been reduced in recent years and is currently £3,000 (for tax year 2023/24).
In summary, we appeal to Trustees to keep CGT in mind at each point of transfer in relation to their trust. Trustees must file accurate self-assessment tax Returns detailing CGT due by the trust and ensure that the tax is paid on time. Suitable advice and assistance with tax reporting is recommended.
Should you require any advice when acting in your role as a Trustee, our Private Wealth & Tax team is more than happy to assist.