Trusts are created for a number of reasons but with reference to property that reason is invariably for protection.
The beneficiary may become unable to manage the property themselves or become mentally incapable of doing so or be a minor(i.e. a child under the age of eighteen years) who is unable, as yet, to take on responsibility for the property themselves;the donor may wish for the property to remain within the family which might not necessarily be the case should the beneficiary become bankrupt or divorce.
Whatever the reason there are capital gains tax (CGT) tax implications on the transfer of property into the trust because the settlor is treated as having disposed of the property as a gift at ‘market value’ at the date of transfer. The ‘market value’ rule applies because the settlor and trust are deemed to be ‘connected’.
'Hold over’ relief may be available which effectively allows a chargeable gain to be deferred (‘held over') and passed to the recipient of the gift (in this case, the trust itself) until either the property is sold or transferred out of the trust or the trust ceases.The charge is on the increase in value from the date of transfer into the trust and the final sale proceeds as usual, but the CGT ‘hold over’ amount is added to the final amount payable. Broadly, where trusts are involved, ‘hold-over’ relief is only available on a transfer that gives rise to an inheritance tax (IHT) liability (such as a gift of property into a 'discretionary' trust) or on the transfer of business assets. The settlor must be UK resident for this relief to be claimed.
Should CGT be charged the calculation is after deduction of the annual exempt amount for trusts, taxed at 18 per cent (20 per cent if the transfer is of residential property).
No CGT is charged on the transfer of property into a trust created on death (a 'Will Trust'). In addition, for the purposes of any later CGT liability, the acquisition cost by the trust is deemed to be the value at the date of death, thereby creating a ‘tax-free uplift’ in the base cost of the asset.
'Will Trusts' are treated as being a disposal of part of the estate’s assets subject to the Nil Rate Band and seven-year rules. In addition, any estate which includes a property that at some time during its period of ownership had been occupied by the deceased as a main residence, downsizedto a less valuable home, sold, or given away after 8 July 2015, qualifies for an additional allowance named the Residence Nil Rate Band' ('RNRB) so long as the residence is transferred into a specific type of will trust; e.g. an IPDI trust for a lineal descendant (or their spouse/civil partner).
HS295 Relief for gifts and similar transactions (2015)
TCGA1992, s 165
Written by Jennifer Adams for Tax Insider