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On the transfer of property into a trust, the original owner of the property (the ‘settlor’) is treated as having gifted the property to the trust at market value for capital gains tax (CGT) purposes. The ‘market value’ rule applies because the settlor and trust are deemed to be ‘connected’ when the trust comes into existence.

If the property transferred has increased in value since the date of the settlor’s acquisition, then the settlor will have a chargeable gain and possibly CGT to pay. However, the settlor can claim to defer (‘hold-over’) the charge if the trust has been created whilst the settlor is alive (assets transferred into a trust on death do not attract CGT).

‘Hold-over’ relief is a way to defer the payment of CGT until the trust sells the property. The relief is not available should the settlor retain an interest in the property transferred.

Example:
Andy creates a trust whilst he is still alive and transfers two properties into it.
 
The original total purchase price of the properties was £300,000; the value at the date of transfer into the trust is £500,000 – the gain of £200,000 being ‘held-over’.

Four years later the trust sells the properties for £1,000,000. The trust will be liable to tax on a total gain of £700,000 – comprising the gain made whilst the properties were held within the trust and the gain ‘held-over’.

This is a sample tip taken from our 165 page guide:

101 Tax Tips For Landlords 2016/17