Trusts

For the record this is merely a guide, l have studied this but never done it professionally
and the book l am using is a 2022 version, hence there may be changes l will not include
but the advice should largely be valid.

There are essentially two types of things to consider when dealing with assets:

CGT – Capital Gains Tax

IHT – Inheritance Tax

Generally, when you deal with assets there are two effects being on your CGT and IHT.
Unfortunately the rates of tax also differ depending on which we are dealing with.

For CGT there is what is an AEA – annual exempt amount, think of it as being similar to
your tax free band. It was about £6 000 (2023-24) and there are rules around it.

Like income tax, there are two main rates to CGT depending on whether you are a higher
rate/additional rate taxpayer or are a basic rate taxpayer

So the rates are either 10% basic rate and if you are not the maximum is 20%
However if it is a residential property Basic is 18% and above it is now 28%

If you

So if you dispose of an asset it attracts CGT – disposals include:

- Selling
- Giving
- Losing
- Surrendering
- Etc

Basically if you somehow transfer an asset you are eligible to CGT.

You can elect to transfer the asset to a spouse/partner.

Such transfers are exempt from tax.
So this is probably the best way to avoid CGT.
However this is different for IHT purposes which will be discussed later.

There is no tax until that partner disposes of the asset.

This will be the value from when you transferred it to her.

So if you own a house bought for £100 000

If the house is now £400 000 your gain before reliefs is £300 000.
For CGT purposes the asset is not transferred at £400 000 but on £100 000, as follows

Market value 400 000

Spousal exemption (300 000)
Base cost of the asset 100 000

So if the asset is later sold at £800 000 then the gain is £700 000 and not £400 000.

However, there are some things you can do. For instance if you transfer assets to
someone and the two of you make a joint election, in writing, the CGT payable by you, is
no longer chargeable to you but that other person.

E.g. A house worth 1 000 000.

Proceeds (money from sale) 1 000 000

Cost of the house (300 000)
Gain before reliefs 700 000
AEA (assuming it has not been used) (6 000)
Chargeable gain 694 000

Now there is an interaction between CGT and income tax, your income tax will determine
how much of the basic rate you will have.

e.g. Let us assume you have rental income or work income of £0.

Basic rate band 2023 - £37 700

Income 0
Chargeable gain 994 000

So what it means is this - you can use the whole of the 37 700 as basic rate.

However, it would be different if you had interest, dividends or salary as this would
reduce the basic rate band. Let us look at another example.

If this person is a basic tax payer his tax would be calculated as follows, assuming he has
no other income:
Let assume income is 40 000 from interest, dividends and work

Basic rate band 2023 - £37 700

Income 40 000
Chargeable gain 994 000

This means because £40 000 > 37 700, your whole gain is charged at the higher rate
because your other income is more than 37 700. So for tax they first apply the basic rate
to income before capital gains.

So to continue with the example.

E.g. A house worth 1 000 000.

Proceeds (money from sale) 1 000 000

Cost of the house (300 000)
Gain before reliefs 700 000
AEA (assuming it has not been used) (6 000)
Chargeable gain 694 000

Tax
Basic rate (37 700 * 18%) 6 786
Higher rate ( 694 000 – 37 700) * 28% 183 764
Total CGT payable 190 550

Effective tax 190 550/1 000 000 = 19.05%

So despite paying tax at 28%, essentially you have paid at about 19% because of the
basic rate and the AEA.

So essentially the taxpayer would walk away with £800 000.

However, if the taxpayer did not want to or could not pay tax, through the election this
would be now no longer taxable to him but the recipient.
Let us show this:

E.g. A house worth 1 000 000.

Proceeds (money from sale) 1 000 000

Cost of the house (300 000)
Gain before reliefs 700 000
AEA (assuming it has not been used) (6 000)
Chargeable gain 694 000
Gift relief (694 000)
Tax due 0

So what does this mean. It means the person receiving the asset will now theoretically
have to pay the tax, which was £190 550 as previously calculated. However, as long as
that person does not sell the house, there is no CGT payable. So in your father’s case, let
us say your father has 3 houses and he gifts them to all of you boys.

Your father would not need to pay any tax on the transfer of the houses to you and you
would not pay anything as long as you do not sell the houses.

If you sell the houses then you would pay tax. However, if you buy another house with the
money, provided the value is more than the gain then you would not have to pay tax. If
the house is lower, then you would pay tax on the difference. Anyway let us not
complicate any further. I may include an example later.

Let us assume your father has two houses. He may make use of something called PPR
relief. Principal Private Residence. This basically means where the taxpayer, has more
than 1 house, he can choose which one is called the main home. If this is done it can
reduce his CGT .

There are some rules which largely depend on whether the individual was in the house
or not.

They will look at the following:

Any period of absence up to 3 years for any reason
Any period of absence, no limit if someone was sent to work overseas
Any period of absence up to 4 years when someone was sent to work somewhere in the
UK
The last 9 months of ownership are deemed to be occupied even if the individual was not
there.
 Example 2. Your father has 2 houses 1 for £1 million and the other for £2 million.
Let us say he spent most of his time in the house worth £1 million.

A B
Selling proceeds 3 000 000 5 000 000
Cost (1 000 000) (2 000 000)
Gain 2 000 000 3 000 000
AEA 0 (6 000)
Chargeable gains 2 000 000 2 994 000
PRR (2 000 00) (100 000)
Chargeable amount 0 2 894 000
Tax at 28% 810 320

NB - you have one AEA which was applied to the higher property to reduce the tax

Calculation of PRR.
Away for work 0
Away for overseas work 0
Away for any other reason 0
Last 9 months 9
Time in the house (22 * 12) 264

So to make it easy to calculate let us assume the house was bought on 1 January 2003
and sold on 31 December 2024.

So total ownership period is 22 years = 21 * 12 = 264

PRR = Gain * Actual and deemed ownership

Total period of ownership

So assuming it is House A =

PRR = 2 000 000 * 252/252 = 2 000 000

House B – Let us assume he had bought this property on 1 January 2010 and disposed of
it on 31 December 2024.
Calculation of PRR.
Away for work 0
Away for overseas work 0
Away for any other reason 0
Last 9 months 9
Time in the house (15 * 12) 0
Total 9

It is assumed as he was living in the other property, he never spent any time in the
second property which was held for rental purposes.

PRR = 3 000 000 * 9/180 = 100 000

So we can look at it this way. The individual had chargeable gains of £5 000 000
however, only paid tax of £810 320. That works out to a tax rate of 810/5 000 = 16%.
So he would get to keep £4 189 680 or £4.1m

This is an effective saving of 12% tax which is very good any way you look at it.

Alternatively we can say.

Gains before reliefs 5 000 000

Assuming AEA used for other CGT purposes (0)
Gain after reliefs 5 000 000
Tax due at 28% assuming Higher rate band (1 400 000)
Net gain 3 600 000

So instead of having £3.6m the tax pay has £4.1m which is a tax saving of £500 000.

However, the taxpayer can even avoid all tax buying doing the following.

Let us assume he decides to gift the second property to his son.

A B
Selling proceeds 3 000 000 5 000 000
Cost (1 000 000) (2 000 000)
Gain before reliefs 2 000 000 3 000 000
AEA 0 (6 000)
Chargeable gains 2 000 000 2 994 000
PRR (2 000 000) (100 000)
Balance 0 2 894 000
Gift relief 0 (2894 000)
Chargeable amount 0 0
Tax at 28% 0
Therefore at the end of the day, the taxpayer has managed to escape all CGT. However, it
means his son should they sell the house would be liable for it. For the purposes of tax,
the house is transferred to him at the following amount.

Value of the property 5 000 000

Gain before reliefs (3 000 000)
Transfer value 2 000 000

As you can see this is the same cost the father had paid, so like we said before, it’s
like the father has avoided tax by transferring the gain to the son.

As previously stated, there is no immediate tax charge until the house is sold.

Even if the house is sold, provided the son buys another house which is the same
value or more expensive no gain will be chargeable.

Example of rollover relief.

Let us assume the son decides to sell the house when it becomes £10m.

£m
Proceeds 10
Cost (2)
Gain before reliefs 8

The taxpayer normally has some time before the gain is due.
If the taxpayer has made improvements on the property these will be allowable.

£m
Proceeds 10
Cost (2)
Gain before reliefs 8
Other costs (2)
Chargeable gain 6

Assuming he is a higher rate taxpayer and he has no reliefs available to him, then the he
may need to pay 28% which would be about £1.68million.

if however, the taxpayer decides to purchase another property say for £20 million then
this would be the position.
Cost 20
Proceeds (10)
10
Less gain rolled over (6)
Base cost 4

As you may have observed this is equal to the original cost being:

Cost of buying the property 2

Other costs 2
Total 4

However, this is only available if the property was used for letting/rental purposes, so it
must have been used for business.

I hope you understand this. I will do a follow up concerning IHT. This took me about 2
hours. So l hope it is useful and more importantly understandable. Let me know.

I hope to be able to do it tomorrow and then hopefully you have a good picture.

Sadly, there is an interaction between the two which further complicates matters. Tax is
something else and the UK system is one of the most complex.

By the way… very important.

You asked about cash, which according to CGT rules is exempt. Other items which are
exempt are the following:

 Assets originally costing less than £ 6 000

 Wasting chattels, things like furniture basically assets with a life of < 25 years
 Cash
 ISAs
 Medals, awards if earned not purchased
 Currency
 Main Residence:
 The sale of your main residence is generally exempt from CGT through Principal
Private Residence (PPR) Relief. There are specific conditions, and certain portions of
the property used for business purposes may not be fully exempt.

 Personal Belongings:
 Personal belongings, such as clothing and household items, are typically exempt from
CGT.

 Gifts to Spouse or Civil Partner:
 Transfers of assets between spouses or civil partners are usually exempt from CGT.

 ISAs (Individual Savings Accounts):
 Gains on investments held within an ISA are exempt from CGT.
 Government Securities:
 Gains on certain government securities, such as Gilts, are generally exempt from CGT.
 Qualifying Corporate Bonds:
 Gains on certain qualifying corporate bonds may be exempt from CGT.
 UK Government Savings Certificates:
 Gains on UK Government Savings Certificates may be exempt.
 National Savings & Investments (NS&I) Products:
 Gains on certain NS&I products, like Premium Bonds and Savings Certificates, may be
exempt.
 Chattels:
 Certain personal use chattels with a market value of £6,000 or less at the time of sale
are generally exempt.