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Trusts
Gift relief
Where a capital asset, say shares or property,
is the subject of a gift then for CGT purposes it is generally treated as a
disposal of the asset at its market value so that either a gain or loss arises.
However where a gain arises it is possible, so long as certain conditions are
satisfied, to defer the gain using the gift relief provisions. The gain is then
charged to tax on any subsequent disposal by the recipient.
The
conditions to be satisfied are broadly either that the asset in question is a
‘business asset’ or that the gift is of the type that is immediately
chargeable to inheritance tax (generally gifts to discretionary trusts).
The government is concerned that certain avoidance schemes are being used.
The effect of these is to defer a gain under the gift relief provisions but in
such a way that the deferred gain is ultimately eliminated or reduced.
Provisions are therefore introduced which take effect immediately to deny gift
relief in certain circumstances. Two main scenarios are envisaged.
The
first involves the gift of an asset to a trust in which the donor has some sort
of interest (a ‘settlor interested trust’). With immediate effect
gift relief is denied altogether on such transfers. The effect is to
crystallise the gain on the transfer. Since CGT taper relief was introduced in
1998, settlor interested trusts have often been used to improve the taper
relief position on the ultimate disposal of assets. Although this does not seem
to be the mischief at which the Pre-Budget Report announcement is aimed such
transactions appear to be caught.
The second is aimed at a more
specific scheme where a discretionary trust is used to defer a gain on a
property which is then occupied by one of the beneficiaries as their main
residence. On disposal of the property by the trustees the whole gain is exempt
from CGT under the main residence exemption rules. The government has moved to
block this device so that either the gain on set up of the trust can be
deferred or main residence relief can subsequently be claimed but not both.
This measure also takes immediate effect and may also affect the main residence
relief available where the property was transferred into the trust before 10
December 2003.
Rates of tax
From 6 April 2004 the rate of tax on the
income and capital gains of trusts will increase from 34% to 40% (and the
corresponding dividend trust rate from 25% to 32.5%). The government’s
stated intent in making this change is to remove ‘a distortion that
provides avoidance opportunities for some higher rate taxpayers’.
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