Can I place assets into trust ahead of possible CGT changes?

The Government is considering doubling the rate of capital gains tax (CGT). Should I consider placing certain assets I own into a trust, paying CGT at the current rate and thus avoiding it at the higher rate in the future. Is that possible and what are the downsides?

CGT is currently charged at 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers. This changes to 18% and 28% respectively where gains relate to residential property. If the government accepts recommendations made last year by the Office of Tax Simplification, a statutory body, CGT rates could increase to 20%, rising to 40% and 45% for higher and additional tax ratepayers. There is no way to avoid paying CGT, but there are options to mitigate any increase in CGT rates, depending on what those assets are.

If the assets noted above were to include a commercial property from which a rent is paid and perhaps there is a plan to eventually sell on, 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 the rent.

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 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 would 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.

However, this is not a move to be considered without first taking expert advice to understand your specific detail on the downsides. CGT on the transfer into the trust of residential property will need to be reported and paid within 30 days of completion. If the asset being transferred holds a mortgage it could trigger a stamp duty land tax charge too.

You also need to consider the consequences for inheritance tax (IHT) both for your estate and the trust, including a potential double charge. If the asset is worth more than the nil rate band of £325,000 per person, there could be an immediate IHT charge payable based on the lifetime rates at 20%.

For more information, contact your Prosperis adviser at 01423 223640 or email us below.