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Introduction to trusts and Capital Gains Tax

This guide provides an introduction to Capital Gains Tax for UK resident trusts. It covers when Capital Gains Tax needs to be paid and when it doesn't and explains how to tell HM Revenue & Customs (HMRC) if this tax is owed.

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What is Capital Gains Tax?

Capital Gains Tax is a tax on the gain in value of assets such as shares, land or buildings that you own. You'll normally only have to pay Capital Gains Tax when you sell, give away or otherwise 'dispose' of an asset that has increased in value since you got it. You only pay Capital Gains Tax when the overall chargeable gains for the tax year are above a certain level called the 'annual exempt amount'.

Capital Gains Tax rate and the annual exempt amount for trustees

The rate of Capital Gains Tax for trustees for the 2014 to 2015 tax year is 28%.

The annual exempt (tax-free) amount in 2014 to 2015 for most trusts is £5,500. An exception to this is a trust set up for a beneficiary who is disabled. In these cases the annual exempt amount is £11,000 - the same as for individuals.

Trustees may be able to reduce the rate of this tax if they qualify to claim Entrepreneurs' Relief.

More about Entrepreneurs' Relief

Check Capital Gains Tax rates and thresholds for earlier years

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Situations when Capital Gains Tax may be due

There are different occasions when a trust may generate a Capital Gains Tax charge, and these will determine who has to pay.

Assets are transferred into a trust

In this situation, the person who makes the transfer - the settlor or transferor - pays. The exception is when the transferor makes a claim for Hold-over Relief. In this case the person who receives the asset will pay Capital Gains Tax when they sell or transfer the asset.

Trust assets are distributed from a trust ('disposed of')

In this case, those responsible for managing the trust - the trustees - usually pay. The main exception is where there is a bare trust, in which case the beneficiary is already 'absolutely entitled' to the trust property.

Trustees cease to be resident in the UK or cease to be liable to pay UK tax

If this happens, the trustees pay Capital Gains Tax based on the market value of the assets in the trust immediately before the change in their residence status.

A beneficiary becomes 'absolutely entitled' to some or all of the assets in a trust

A person is 'absolutely entitled' to an asset in a trust if they have the exclusive right to direct the trustees on how to deal with it. In this case, someone may become absolutely entitled because they reach a certain age or the trust comes to an end. The trustees pay Capital Gains Tax based on the market value of the asset on the date the beneficiary becomes entitled.

Find out about bare trusts

Find out about calculating Capital Gains Tax and reliefs for trusts

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Situations where Capital Gains Tax isn't payable

In some situations an asset may be transferred to someone else but Capital Gains Tax is not payable.

Someone dies and leaves their assets to a beneficiary or trust

When a person dies and they leave their assets to someone, whether in a trust or not, there is no Capital Gains Tax to pay. If the asset is 'disposed' of at a later date and the asset has increased in value since the value at the date of death Capital Gains Tax may be due. This applies to both trustees or beneficiaries who inherit the asset under the terms of a will or the rules of inheritance that apply in England and Wales when there is no will.

Someone dies and an interest in possession comes to an end

This happens in 'interest in possession' trusts - where a beneficiary has an immediate and absolute right to income from an asset held in trust. There is usually no Capital Gains Tax to pay when the beneficiary dies and their interest in possession comes to an end.

Find out more about interest in possession trusts

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Working out how much Capital Gains Tax is due

Capital Gains Tax is worked out for each tax year (which runs from 6 April one year to 5 April the following year). It's charged on the total of your taxable gains after taking into account:

  • relevant costs and reliefs that can reduce or defer gains - follow the link below to find out more
  • allowable losses
  • the trustee's annual exempt (tax-free) amount

The remaining amount is taxed at the current rate for Capital Gains Tax - 28% for trustees.

Find out about calculating Capital Gains Tax and reliefs for trusts

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Telling HMRC about capital gains made by a trust

As a trustee, you must tell HMRC about disposals the trust makes if either of the following applies in a tax year:

  • the value of the disposal(s) exceeds the annual exempt amount for Capital Gains Tax by four times (£44,000) and you've been issued with a Trust and Estate Tax Return
  • you're liable to pay Capital Gains Tax

You do this by completing form SA905 Trust and Estate Capital Gains (the Capital Gains Tax supplementary pages of the Trust and Estate Tax Return).

Get form SA905 Trust & Estate Capital Gains and guidance notes

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Getting HMRC to check the value of your asset

If you want HMRC to check the valuation you've made of an asset that you have to pay Capital Gains Tax on, you can use the form below. If they agree with your valuation, they will not challenge your use of it in your Trust & Estate Tax Return.

Get form CG34 Post-transaction valuation checks for capital gains

Contact HMRC Trusts & Estates

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More useful links

Get Helpsheet 294 Trusts and Capital Gains Tax

Capital Gains Tax rates and annual tax-free allowances

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