The prudent trustee: Non-UK trusts and CGT reform

Our team: Helen Cox, Helena Luckhurst, Mark Spash, Jonathan Riley

14 December 2020

The UK Government is considering recommendations that have been made to reform Capital Gains Tax (CGT).  The recommendations were made in a report last month by the government appointed Office of Tax Simplification.  We reported in July and November that trustees should consider taking a number of steps in view of possible tax reforms that have been debated for some time.

Of course, the Government might choose to ignore these recommendations however trustees that are potentially impacted should consider whether there are any steps to take now.

Aligning capital gains tax rates with income tax?

The report recommends that, as one aspect of reform, the government might more closely align rates of CGT with income tax.

Offshore trustees pay CGT in respect of disposals of UK real estate and UK trading businesses.  Other gains are not taxed as they arise but they are taxed when they are matched with benefits provided to UK resident beneficiaries.   Capital gains that have not been previously matched are subject to a supplemental charge of 10% of the applicable CGT rate each year up to a maximum of six years – this results in a maximum CGT charge of 32%.  If the rate of CGT was aligned to the rate of trust income tax (45%) the effective rate of CGT could be as high as 72%.

Aligning these tax rates is only one of a number of recommendations.  Of course, the government might or might not put into effect any of the recommendations.  However, reform of some kind would seem likely.  In view of this, now would be a good time for non-UK resident trustees to consider whether their arrangements are optimised from a CGT perspective.  They might for example consider some or all of the following:

  • accelerate distributions to beneficiaries so they are matched to gains at the present rate;
  • consider crystallising gains through sales or other disposals, including sub-fund elections;
  • take advantage of any available CGT reliefs now; and
  • consider whether their investment strategy is optimised.

The government is considering how inheritance tax is assessed as well as CGT.   It is possible that before long the present rates and rules might appear relatively benign.  A prudent trustee should review their options now so they can plan effectively and so that any decisions they take are fully informed.

If you would like to discuss how best to manage a trust’s UK tax exposure, please get in touch with your usual Private Wealth contacts at Fladgate.

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