ACCA ATX ^UK Syllabus A2. Chargeable gains - Capital gains tax and trusts - Notes ^{1 / 1}

CGT Implications

Any type of gift into a trust will be treated as a sale for market value. 

But remember, that any gift into and out of a trust is eligible for gift holdover relief, therefore no capital gains tax will arise as the capital gain will be held over.

• Recap of gift holdover relief

  Jake makes a gift of shares into a trust when they have a market value of £50,000. 

  They cost £10,000.

  Therefore, the capital gain:

  Sale proceeds £50,000
  Cost (£10,000)
  Capital gain £40,000

  As gift holdover relief applies here, the capital gain will be held over, what will the base cost of the shares be for the trustee?

  Market value £50,000
  Less: gain deferred (£40,000)
  Base cost £10,000

  Therefore, if the trustee decides to sell the shares, they will use a cost of £10,000 when calculating the capital gain. 

  Remember that this capital gain will only arise if the shares are sold while they are in the trust, because gift holdover relief will apply for assets going into or coming out of the trust.

Selling assets while they are in the trust

The trustees can dispose of chargeable assets outside of the trust, however they will only:

1. Get 1/2 of the Annual Exemption (£3,000/2 = £1,500)

2. Be taxed at the higher rate of CGT (20%)

Illustration

For the example used above, the trustees sold the shares for £60,000. 

What capital gain will arise?

• Solution

  Sale proceeds £60,000
  Base cost (£10,000)
  Capital gain £50,000
  Less A/E (£1,500)
  Chargeable gain £48,500
  CGT £48,500 *20% = £9,700

Illustration

For the example above, the shares passed to the beneficiary when their market value was £75,000. 

What will the base cost of the shares be for the beneficiary?

• Solution

  A gift passing out of a trust will be a sale at market value, however, it is eligible for gift holdover relief.

  Sale proceeds £75,000
  Base cost (£10,000)
  Capital gain £65,000

  Base cost

  Market value £75,000
  Less capital gain deferred (£65,000)
  Base cost £10,000

  This cost will be used when the beneficiary wants to sell the shares.

Recap

1) Gifting into an out of trusts are eligible for gifts holdover relief

2) An asset sold while it is in a trust will give rise to a chargeable gain, the trustees will get 1/2 of the annual exemption and pay CGT at 20%.