Creating trusts has proven an effective way of passing wealth onto subsequent generations but according to HM Revenue & Customs, there may still be capital gains tax payable.
CGT applies in most cases when an asset that has increased in value is taken out of or put into a trust.
According to HMRC, trustees only have to pay CGT on a trust if the total taxable gain is above the trust’s tax-free allowance - the annual exempt amount, which has been the same since 6 April 2015.
Types of trust
There are many different types of trust, and each one has a slightly different tax treatment. Trusts involve three parties usually - a trustee (someone who looks after the trust), a settlor (someone who sets up the trust) and a beneficiary (whoever benefits from the assets in a trust).
According to HMRC, the main types of trust are:
■ bare trusts.
■ interest in possession trusts.
■ discretionary trusts.
■ accumulation trusts.
■ mixed trusts.
■ settlor-interested trusts.
■ non-resident trusts.
The tax-free allowance for trusts is £5,550, and £11,100 if the beneficiary is disabled.
If there is more than one beneficiary, the higher allowance may apply even if only one of them is disabled.
The tax-free allowance may be reduced if the trust’s settlor has set up more than one trust since 6 June 1978.
CGT may be payable if assets are put into a trust. It is paid either by the person selling the asset - unless they can claim hold-over relief - or by the person transferring the asset - the settlor.
If assets are taken out of the trusts, trustees will have to pay the tax if assets are sold or transferred on behalf of the beneficiary.
However, there is no tax to pay in bare trusts if the assets are transferred to the beneficiary.
Sometimes an asset might be transferred to someone else but CGT isn’t payable, for example when someone dies and leaves their assets to a trust or an ‘interest in possession’ ends.
Also, sometimes the beneficiary of a trust becomes ‘absolutely entitled’ and can tell the trustees what to do with the assets (for example, if the beneficiary hits the legal age at which they can benefit from the trust’s assets). In this case, the trustees pay CGT based on the assets’ market value.
Where a trust is set up by a parent for the benefit of a minor, the parental settlement rules apply. Gary Smith, financial planner for Tilney Bestinvest, explains: “Each kind of trust has differing tax positions, which can be complicated.
“Care needs to be taken where a parent sets up a trust and the child is a minor, as any interest or dividends generated above £100 per parent will be taxed on the parent, even though the money is held in trust.”
Are there reliefs?