Placing an asset into a trust is a disposal for Capital Gains Tax purposes, even though no money actually changes hands and the person setting up the trust may still indirectly benefit from the assets. This surprises many people who assume that because the transfer is a gift rather than a sale, no Capital Gains Tax can possibly be due.
Why Transferring Into Trust Is a Disposal
When you transfer an asset into a trust, HMRC generally treats this as a disposal at market value, regardless of the fact that you received no cash consideration. If the asset has grown in value since you acquired it, this deemed disposal can trigger a Capital Gains Tax charge on the increase in value, payable by the person setting up the trust (the settlor), even though the asset has simply moved into trust rather than been sold to a third party.
Holdover Relief for Gifts Into Trust
In many circumstances, particularly where the trust is a discretionary trust or the asset qualifies as a business asset, Holdover Relief can be claimed to defer this Capital Gains Tax charge. Rather than the settlor paying tax immediately, the gain is “held over” and the trust takes on a reduced base cost reflecting the deferred gain, meaning the tax becomes payable later, when the trust eventually disposes of the asset, rather than at the point of transfer.
Not All Transfers Qualify for Holdover Relief
Holdover Relief is not automatically available for every transfer into trust. Transfers of an individual’s main residence into trust, for example, are more complex because Private Residence Relief and trust rules interact in specific ways. Similarly, transfers into certain types of trust, such as some interest in possession trusts, may not qualify for holdover in the same way as transfers into a discretionary trust. Each transfer needs to be assessed individually against the qualifying conditions.
Capital Gains Tax Within the Trust
Once assets are held in a trust, the trustees become responsible for any Capital Gains Tax arising on future disposals made by the trust. Trusts have their own, generally much lower, annual exempt amount compared to an individual, and gains within a trust can be taxed at different rates depending on the type of trust involved, which is an important factor when weighing up whether a trust structure is genuinely tax-efficient for a particular family’s circumstances.
When Assets Leave the Trust
When assets are eventually distributed out of the trust to a beneficiary, this can itself be a further disposal for Capital Gains Tax purposes, and Holdover Relief may again be available to defer the gain arising at that point, effectively passing the deferred tax liability on to the beneficiary rather than crystallising it within the trust. Coordinating these transfers carefully across the life of a trust is important to avoid an unexpected tax charge landing in the wrong place at the wrong time.
Conclusion
Moving assets into a trust is not a way of avoiding Capital Gains Tax, it is a disposal that can trigger an immediate charge unless Holdover Relief is available and properly claimed. Understanding which transfers qualify for relief, how the trust’s own Capital Gains Tax position works once assets are held there, and what happens when assets are eventually distributed out again are all essential considerations before setting up any trust arrangement.
People Also Ask
Do I pay Capital Gains Tax when I put an asset into a trust?
Potentially yes, since the transfer is treated as a disposal at market value, although Holdover Relief may defer the charge in many circumstances.
Does a trust have its own annual exempt amount?
Yes, but it is generally much lower than the amount available to an individual.
Is Capital Gains Tax due again when assets leave a trust?
It can be, since distributing assets out of a trust to a beneficiary can itself be a disposal, though Holdover Relief may again be available in qualifying circumstances.
