Capital Gains Tax
The trustees are a separate entity for Capital Gains Tax purposes and are liable to pay tax on any gains the trust makes over and above the annual allowance.
Gains are calculated by reference to the market or sale value of the asset at the date the trust disposed of it, compared to the value at the date the trust acquired it. Certain deductions are allowable to reduce the gain.
The annual allowance for trusts is half of that of an individual – currently (2021-2022) £12,300 (£6,150 for trusts).
If a beneficiary of the trust is occupying a property owned by the trustees then the trust can mitigate Capital Gains Tax by using the main residence relief provisions. However there is no rebasing of asset values on the death of a discretionary beneficiary.
Any investments owned by the trustees should be carefully managed to reduce this tax burden. Any transfer of an asset out of the trust may give rise to a liability if there has been a substantial gain prior to distribution though in some circumstances holdover relief may apply.
Capital Gains Tax rates vary depending on the nature of the asset disposed of. Residential Property is taxed at 28% while other chargeable assets are taxed at 20%. This is subject to change by the government.
The first £1,000 is taxed at 7.5% (dividend income) or 20% (all other types of income). Thereafter dividend income is taxed at 38.1% while all other income is taxed at 45% (2021-2022).
If income is distributed during the year, the person who receives the income may claim back the extra tax paid by the trust, if they are a non tax or basic rate tax payer.
Therefore, careful planning can mitigate the additional income tax burden and distributions of the trust income can use up the personal allowances of young beneficiaries who have no other income.