Trusts and Capital Gains Tax

Introduction

Trusts face their own Capital Gains Tax (CGT) rules when trustees sell or dispose of assets. The tax treatment depends on the type of trust, with different annual exemptions and rates applying compared to individuals, and special rules govern how gains are taxed when assets are distributed to beneficiaries.

What counts as a disposal by trustees

Trustees must pay Capital Gains Tax when they dispose of trust assets. A disposal occurs when trustees sell an asset, give it away, exchange it for something else, or receive compensation (such as an insurance payout for a damaged asset).

The gain is calculated by taking the disposal proceeds and subtracting the asset's original cost, plus any allowable expenses such as improvement costs or professional fees incurred when buying or selling the asset.

Types of trusts and their CGT treatment

Bare trusts

In a bare trust, the beneficiary has an immediate and absolute right to both the trust assets and any income they produce. For Capital Gains Tax purposes, assets in a bare trust are treated as belonging directly to the beneficiary, not the trustees.

This means when trustees dispose of an asset in a bare trust, any gain or loss is treated as if the beneficiary made the disposal themselves. The beneficiary uses their own annual exempt amount and pays tax at their own CGT rates.

Settlements and other trusts

Most other trusts are treated as "settlements" for tax purposes. These include discretionary trusts, interest in possession trusts, and accumulation and maintenance trusts. In these cases, trustees are treated as a separate person for Capital Gains Tax, distinct from both the settlor (the person who created the trust) and the beneficiaries.

When trustees of a settlement dispose of assets, they calculate and pay Capital Gains Tax separately from the beneficiaries. The trust has its own annual exempt amount and pays CGT at trust rates.

Annual exempt amount for trustees

For the 2025/26 tax year, most trusts have an annual exempt amount of £3,000. This means trustees can realise gains up to this amount in a tax year without paying Capital Gains Tax.

However, if the settlor has created more than one trust, the annual exempt amount is divided between them. The minimum annual exempt amount for any single trust is £600, regardless of how many trusts exist.

This is substantially lower than the annual exempt amount available to individuals, making tax planning particularly important for trustees.

Capital Gains Tax rates for trusts

Trustees pay Capital Gains Tax at different rates depending on the type of asset:

• Standard rate: 20% on gains from most assets
• Residential property rate: 28% on gains from residential property that doesn't qualify for Private Residence Relief

These are the higher CGT rates, equivalent to those paid by higher and additional rate taxpayers. Unlike individuals, trustees don't benefit from a lower basic rate of CGT.

Distributions to beneficiaries

When trustees transfer assets to a beneficiary who has an absolute entitlement (a definite right to demand the asset), special rules apply. This situation commonly arises when a beneficiary reaches a specified age and becomes entitled to trust capital.

The disposal to an absolutely entitled beneficiary is generally treated as taking place at no gain and no loss. This means the trustees don't pay Capital Gains Tax on the transfer, and the beneficiary is treated as acquiring the asset at its market value at the time of transfer.

The beneficiary's acquisition cost becomes the market value when they received the asset, which will be used to calculate any future gain when they eventually dispose of it.

Calculating and reporting gains

Trustees must calculate gains in the same way as individuals. This involves:

1. Establishing the disposal proceeds (usually the sale price or market value)

2. Deducting the original acquisition cost

3. Deducting allowable costs such as improvement expenditure and professional fees

4. Applying the annual exempt amount

5. Calculating tax at the appropriate rate

Trustees must report Capital Gains Tax through the Trust and Estate Tax Return (form SA900). This is separate from the personal Self Assessment process and has its own deadlines and requirements.

Even if gains fall within the annual exempt amount and no tax is due, trustees may still need to report disposals if specifically required to do so by HMRC.

Special considerations for settlors

In certain circumstances, Capital Gains Tax on trust disposals may be charged to the settlor rather than the trustees. This happens when the settlor or their spouse or civil partner retains an interest in the trust.

A settlor retains an interest if trust property or income can be paid to them or their spouse, used for their benefit, or will return to them in the future. When this applies, gains are added to the settlor's own capital gains and taxed at their personal rates using their own annual exempt amount.

This anti-avoidance rule prevents individuals from using trusts to obtain additional annual exempt amounts or benefit from more favourable tax treatment.

Record keeping

Trustees must maintain detailed records of all trust assets, including:

• Original acquisition costs and dates
• Improvement costs and professional fees
• Disposal proceeds and dates
• Calculations of gains and losses
• Details of how the annual exempt amount was allocated

These records must be kept for the duration of the trust's existence and for sufficient time afterwards to cover HMRC's enquiry window.

Sources

• Trusts and Capital Gains Tax (Self Assessment helpsheet HS294)

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.