Capital Gains Tax
Capital Gains Tax (CGT) on Trusts
If McClure Solicitors helped you set up a Family Protection Trust to hold your house or other assets – you may now face unexpected capital gains tax (CGT) exposure. The trust is potentially subject to CGT on a sale of the house or other assets or transfer back to the settlor or to another beneficiary.
CGT is based on any increase in the value of the house or other asset during the period of its ownership by the trust. However, for a house very few trusts will have an actual liability because if the house has been occupied as a main residence by the Settlor or another beneficiary the trust is entitled to Private Residence Relief calculated in the same way as on a disposal of an individual’s own residence. There is one important difference though – for individuals any gain is exempt, and no CGT return is required. A trust must file a return and claim the relief.
Most sales will follow the death of the settlor or other beneficiary who occupied the property or perhaps the settlor going into permanent residential care. The last nine months of ownership is always treated as qualifying for private residence relief, so unless the sale takes longer than 9 months from the date the house became unoccupied then no chargeable gain arises. This nine-month period is extended to 36 months if the person occupying the house had gone into permanent residential care.
More details on private residence relief as it applies to trusts can be found in the following links:
LINK: Private Residence Relief
LINK: Capital Gains Manual – HMRC Internal Manual
LINK: Private Residence Relief – Final Period Exemptions
The other type of asset commonly held within these FPTs is an insurance investment bond. Gains on these are subject to income tax, not CGT. Any income tax due will be assessed on the Settlor if alive and the trust if not. Special tax rules applying to investment bonds result in no tax liability, provided the bond is assigned (transferred) to a beneficiary rather than cashed in by the trustees and the proceeds distributed.
If you have an investment bond in your FPT have a look at this link for some general information on their tax treatment:
LINK: Investment Bonds & How They Work