A Masterclass in CGT Planning & Trusts
Part 2 of our CGT Masterclass Trilogy will explore how Capital Gains Tax applies to Trusts including planning opportunities for you and your clients, to defer or mitigate any liability, either partially or completely.
Rates that apply to Trustees
This largely depends on the trust type, if the trust is treated for tax purposes as a Relevant Property Trust, then the Rate Applicable to Trusts (RAT) will apply, i.e. the higher rates of 28% for residential property and 20% for non-residential property.
Absolute or Bare Trusts look through to the qualifying beneficiary, i.e. the absolute beneficiary and so the tax charged at that person’s marginal rates, not the RAT.
A relevant property trust also has half the usual CGT allowance, which is then reduced proportionally for every other trust that a settlor creates until it reaches a minimum of 1/5 of the CGT allowance.
Using Trusts to defer CGT
Disposing of an asset is potentially a taxable event for Capital Gains Tax, there DOES NOT have to be consideration, for example, money changing hands. For CGT to apply and be due on a disposal, this extends to transferring assets into trust!
For example, transferring a non-main residence into trust would in most instances be a disposal for CGT even though the property has not been sold…. It is the equity in the property that is important and that is moving! Clients could, for example, consider moving the property into a bare trust for themselves, the equity hasn’t moved and so there is no disposal here despite the owners changing (i.e. they are the trustees of a bare trust).
Depending on the trust type, it is possible to holdover the gain into (or indeed out of) the trust but that means that the trust cannot benefit the minor children, the client or their spouse! Is your client wanting to give it away and not retain any benefit?!
Where a gain is deferred (held over), it will come back into charge either on sale or when the equity is moved again (provided the gain is not then held over for a second time and so on…).
Further considerations to holding over into trust:
- Losing uplift on death (the property will be in trust)
- Reducing the amount of CGT allowance available (half for trusts)
- Restriction of Principle Private Residence Relief (where a holdover is considered)
- Cannot Holdover out of trust within 3 months of settlement, or within 3 months of the Periodic Charge
So, what are our options in light of the above?
Using ‘evidential trusts’ to mitigate CGT
Many clients will provide homes for their families to live in, be it a home for university, or simply that they have assisted in a purchase and been added to the title to allow for a mortgage to be given.
What many clients will not consider is the impact on the sale of the property, this is a second home and NOT the main residence of the client, therefore there is no PPR relief on their share of the property, EVEN THOUGH it has been occupied by a family member!
With an evidential trust, we can confirm the facts and either partially or totally mitigate any CGT that may accrue at the point of sale.
What’s more, if a client is looking to gift a property to a family member and has never received a benefit, it can also be possible, depending on the timeframes to remove the asset for that person’s estate immediately (without having to wait the 7 years).
Deeds of Variation and CGT
Asset values continue to rise despite them being involved in an estate administration, so consideration must be given to any gains that have accrued when making distributions (or sales) as Executors.
Some clients may wish to vary their share of an estate by means of a Deed of Variation, and it is the varying beneficiary’s option to elect that for CGT purposes, the beneficiary (or trust) that the asset has been varied to inherits the property at the probate value (i.e. a potentially reduced base cost).
Smaller Base Cost = Potentially More Tax, so is this the correct choice to make? Should the varying beneficiary utilise his own CGT allowance and thus increase the base cost in the hands of the trustees/beneficiaries?
Would that election actually cause a tax liability to the varying beneficiary?
Our experts will discuss all of the above and lots more!!!
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This article was submitted to be published by Countrywide Tax & Trust Corporation Ltd. as part of their advertising agreement with Today’s Wills and Probate. The views expressed in this article are those of the submitter and not those of Today’s Wills and Probate.