A trust is an arrangement where an asset is transferred by a person (the settlor) to one or more people (the trustees) to hold for other people (the beneficiaries).
For most kinds of trusts, it is the trust itself that is taxable on any income or capital gains that arise.
Below we look at capital gains tax for trusts.
Trustees
The trustees of a property are treated as a single person for capital gains tax purposes, meaning the trust is treated as a separate and single taxable entity.
Capital gains tax is charged when the trustees make a chargeable disposal – when they sell or transfer trust assets.
UK Residence
If trustees are treated as UK residents, the trust is chargeable to capital gains tax on the disposal of assets wherever situated.
Where trustees are non-resident in the UK, the trust is chargeable to capital gains tax only on the disposal of assets which are:
- Situated in the UK and used in the trust’s UK branch or agency,
- Interests in UK land, or
- Assets which derive at least 75% of their value from UK land and the trust has a ‘substantial indirect interest’ in the land.
If all trustees are residents in the UK, then the trustees as a whole will be treated as resident in the UK. If all of the trustees are resident outside the UK, then the trust will be non-resident.
If one or more of the trustees are UK residents, and one or more are not UK residents, then the settlement will be treated as resident in the UK if, at the time the settlor made the settlement, he was UK resident or domiciled.
If the settlor was not UK resident or domiciled, then the settlement will be treated as non-resident. If the settlement has more than one settlor then the settlement will be UK-resident if any of the settlors was a UK resident or domiciled.
Types of Assets
Capital gains tax is charged for chargeable gains accruing on the disposal of most types of assets. Examples of trust assets where capital gains tax can become chargeable are:
- Stocks and shares
- Land
- Commercial and residential property
- Assets such as paintings and antiques
Cost of Assets
Where assets are acquired under a transaction in the ordinary course of the administration of the trust, the trustees’ base cost of the asset is the purchase price.
Assets transferred to the trustees by way of gift are classed as acquired at their market value.
If the trust is created on the death of the settlor under their will, the trustees will be deemed to acquire the assets on the date of death at their market value on that date.
Annual Exemption
The annual exemption is the amount of capital gains that can arise in the year tax-free. The annual exemption is deducted from the overall net chargeable gains for the year to give the amount that is subject to capital gains tax.
The trustees of a settlement are entitled to an annual capital gains tax exemption.
The annual exemption is never less than 10% of that available to an individual. If there is more than one settlor in relation to a particular settlement, then the annual exemption is determined by reference to the settlor who has made the greater number of settlements that are still in existence.
Specialist Accountants Here to Help
If you want to discuss how Capital Gains Tax affects your business or need support on tax, get in touch with our specialised accountants at James & Uzzell today to see how we can help.
Information from Tolley.