Capital gains tax

Your most frequently asked questions

Q: As a trustee do I have to pay capital gains tax?
A: As a general rule the liability to tax on gains arising to a trust falls on the trustee. There are however certain exceptions which are detailed on HM Revenue & Customs (HMR&C) help sheet HS294.

Q: As a beneficiary do I have to pay capital gains tax on gains that the trustees make?
A: No. The beneficiaries are not taxed on trust gains. They do not get credit for capital gains tax that the trustees pay (except for beneficiaries of bare trusts).

There are special rules for beneficiaries of trusts with non-resident, or dual resident trustees.

Q: What is the annual capital gains exemption for a trust?
A: This is normally half the annual exemption for an individual. For 2008/09 it is £4,800. Certain trusts (for example a trust for a mentally disabled person) are entitled to the full annual exemption of £9,600.

Q: Is each trustee entitled to the trust annual capital gains exemption?
A: No. Only one annual exemption is allowable.

Q: What is the current rate of capital gains tax a trustee pays?
A: The gains of the trustees are taxed at the rate applicable to trusts which is:

Q: How do I get my valuations checked before making my return?
A: You should complete one copy of HMR&C form CG34 for each valuation you would like checked.

Q: How long will it take to get my valuations checked?
A. HMR&C expect that it will normally take a minimum of 56 days to agree your valuation or provide you with an alternative.

Q: What is taper relief?
A. Taper relief was introduced in 1998 for disposals after 5 April 1998. For trustees of a settlement, taper relief ensured that a reducing percentage of gain was chargeable to tax. This depended on the number of whole years the asset had been held after 5 April 1998. The greater the number of years the asset was held from 6 April 1998 the smaller the percentage of gain that became chargeable to tax. For all disposals made on or after 6 April 2008 taper relief has been abolished.

Q: What is a settlement?
A: For capital gains tax the word `settlement’ has its normal meaning. It includes property that is held in trust, except for a bare trust. A bare trust, also known as a ‘simple trust’ and is one in which each beneficiary has an immediate and absolute right to both capital
and income. The beneficiaries of a bare trust have the right to take actual possession of trust property.

The property is held in the name of a trustee. But that trustee has no discretion over what income to pay the beneficiary. In effect, the trustee is a nominee in whose name the property is held. The trustee has no active duties to perform.

Bare trusts are treated for tax purposes as if the beneficiary holds the trust property in his or her own name. Income tax and capital gains tax are charged on the beneficiary, as if the trust did not exist.

The beneficiary must declare any income and capital gains on his or her personal tax return. Although trustees can pay income tax on behalf of a beneficiary, it is the beneficiary who is chargeable to tax.

Q: What is a settlor?
A: A settlor is any person who makes a settlement.