Inheritance Tax & Estate Planning: Engage Guide To Wealth Management
Part 2: Capital Gains Tax (CGT) & Trusts
Understanding CGT.
Capital Gains Tax (CGT) is a tax on the profit when you sell or dispose of an asset.
When you make a gift of an asset, such as property or shares, CGT may be payable based on the gain in the asset’s value from the time you acquired it to the time of the gift.
Example: if a £500,000 property, that was originally purchased for £200,000, was gifted by a parent to their child, capital gains tax would be liable on the £300,000 capital gain (less deductible costs). For a higher rate taxpayer CGT will be 24% on the gain. £72,000 in this example.
Holdover Relief
If you’re gifting assets like shares or business property, you may be eligible for “Holdover Relief”, which allows you to defer the CGT liability until the recipient disposes of the asset. This can be particularly beneficial when transferring business assets or shares in a family business.
Gifting to a Spouse or Civil Partner
Transfers between spouses and civil partners are generally exempt from CGT. This means that you can pass assets to your spouse or civil partner without incurring a CGT liability.
Gifting to Charity
Gifts to registered charities are exempt from CGT. If you donate assets that have appreciated in value, you won’t have to pay CGT on the gain, and the charity will receive the full value of the asset.
Planning CGT & IHT Together
It’s important to consider both CGT and IHT when making gifts. While gifting can reduce the value of your estate for IHT purposes, it’s essential to be aware of any potential CGT liability. A well-rounded estate plan will take both taxes into account to minimise the overall tax burden.
Using Trusts.
“ What is a trust?
A trust is a legal arrangement where you transfer assets. Trustees will manage the assets for the benefit of your chosen beneficiaries. While trusts may not be necessary in most estate planning cases, they can offer flexibility, control, and tax advantages in some cases.
Types of Trust
Bare Trusts: The beneficiary has an immediate and absolute right to both the income and the capital. Bare trusts are often used for gifts to minors, who will receive the assets when they reach 18 (16 in Scotland).
Interest in Possession Trusts: The beneficiary is entitled to the income from the trust, but the capital is preserved for future beneficiaries. This type of trust is commonly used to provide for a spouse while preserving the capital for children.
Discretionary Trusts: The trustees have discretion over how to distribute the income and capital to the beneficiaries. This flexibility can be useful in estate planning, as it allows trustees to adapt to changing circumstances.
Accumulation and Maintenance Trusts: These are similar to discretionary trusts but are often used to provide for children or grandchildren. The trustees can accumulate income within the trust and distribute it when appropriate.
Tax Implications of Trusts
Inheritance Tax: Trusts can be subject to IHT when they are set up, during their existence (periodic charges), and when assets are transferred out of the trust (exit charges). However, certain trusts, like Bare Trusts, may be exempt from these charges.
Capital Gains Tax: Trustees may be liable for CGT when they sell or transfer assets within the trust. However, Holdover Relief may be available for certain trusts, allowing the CGT liability to be deferred.
Income Tax: Income generated by the assets within the trust may be subject to Income Tax. The rate depends on the type of trust and the income level.
Advantages of Using Trusts
Control and Flexibility: Trusts allow you to retain control over how your assets are managed and distributed after your death.
Protection: Trusts can protect assets from being spent irresponsibly, lost through divorce, or claimed by creditors.
Tax Planning: Trusts can be used to reduce or defer IHT and CGT liabilities, making them a potential tool for estate planning.