Update 30 October 2024 – Following the Budget announcement today, some of the details mentioned in this insight may have changed. Please visit our Budget page for further information.
Our Head of Estates & Trusts Debbie Wilson has been featured in the Financial Times responding to a readers question on placing assets into trust ahead of possible Capital Gains Tax changes. Read the full article here. (please note – you must be subscribed to the Financial Times in order to read the full article).
Here is Debbie’s response:
CGT is currently charged at 10% for basic rate tax payers and 20% for higher and additional rate tax payers. This changes to 18% and 28% respectively where gains relate to residential property.
If the government accepts the Office of Tax Simplification recommendations, and there is no requirement to do so, CGT rates could increase to 20%, rising to 40% and 45% for higher and additional tax rate payers.
There is no way to avoid paying CGT, but there are options open to individuals that can mitigate any future increase in CGT rates depending on what those assets might be.
If for example, the assets you mention were to include a commercial property where you receive rent and perhaps are planning on selling at some point in the future, it may be possible to place that property into what is called a life interest trust. The terms of that trust could allow you to continue to benefit financially from that asset through, in this example the rent generated.
As you state in your question, the transfer of an asset into a life interest trust is considered a disposal and would attract a CGT charge. That charge is calculated on the difference between the acquisition cost of an asset and its current market value. There is also the annual CGT exemption, currently £12,300 for an individual and £6,150 for sole trusts.
The trust deed should also set out who will benefit from the capital asset held in trust. When the asset held in trust is eventually sold, CGT would be payable at the prevailing rate only on the difference between the market value of the asset when it entered the trust and its net sale proceeds, and again benefit from any annual exemption.
Placing assets into a life interest trust now would effectively cap CGT on gains made to the point of transfer at the current rates. This could represent a considerable saving if the value of the asset has increased significantly. Only any future gain would be taxed at the proposed higher rate.
This is not, however, a move to be considered without first taking expert advice to understand your specific detail on the downsides.
The CGT on the transfer into the trust of residential property will need to be reported and paid within 30 days of completion, other assets remain 31 January following the end of the tax year the deal became contractual. If the asset being transferred holds a mortgage it could trigger an SDLT charge too.
The immediate and ongoing IHT consequences both for your estate and the trust, including a potential double charge, need also to be considered. If the asset is worth more than the nil rate band (£325K pp) there could be an immediate IHT charge payable based on the lifetime rates at 20%.
If you would like further advice or have questions on this, please get in touch with Debbie Wilson on 0207 004 7139 or debbie.wilson@hhllp.co.uk
