• Date

    01 Dec 2020
  • Category

    Tax, Private Client

OTS Capital Gains Tax Review - What does it mean for trusts?

On 11 November 2020, The Office of Tax Simplification (OTS) published their review of Capital Gains Tax (CGT) and put forward eleven recommendations for the Government to consider. Subject to Government policy, the proposals include aligning CGT and income tax rates and reducing CGT allowances. The changes, if enacted, could have a significant impact on settlors and beneficiaries of trusts and, potentially, on the trusts themselves.

It is important to note that the review does not set out to address the CGT position for trusts and specifically excludes the following from its scope:

  • Trusts
  • Attribution of offshore gains to UK resident individuals
  • CGT position relating to an individual’s arrival or departure from the UK.

However, it is likely that at least some of the recommendations, if implemented, would affect trusts and there may be planning that trustees could be considering now to prepare for such changes.

Proposed changes in rates and allowances

One of the most widely publicised OTS proposals is for the Government to consider more closely aligning CGT rates with income tax rates. Currently most income is taxed at rates ranging from 20% to 45%, while capital gains are taxed at rates ranging from 10% to 28% (with the highest rate of 28% only applying to certain assets, most notably residential property). It is therefore almost inevitable that any alignment of CGT rates to income tax rates will lead an increased tax take on capital gains.

Trust tax rates are not dissimilar to individual tax rates, with discretionary trusts being subject to an income tax rate of 45% on most income within the charge to UK tax and interest in possession trusts being subject to an income tax rate of 20% on most income within the charge to UK tax. Trusts are taxed at rates of 20% and 28% on gains within the charge to UK tax, with the higher rate principally applying to UK property. Unless the government introduce a specific carve-out for trusts, it is likely that any alignment of rates will affect both individuals and trusts (with discretionary trusts being particularly affected).

The OTS comment that an alignment of CGT and income tax rates has the potential to raise a significant amount of tax for the Exchequer. However, the OTS also say that if such an alignment is introduced, then the government should consider reintroducing some form of relief for inflationary gains, consider the interaction with the tax position of companies and consider a more flexible use of losses.

The OTS have separately recommended that consideration is given to a reduction in the annual CGT allowance if the government considers the main policy intention of the allowance to be an administrative de minimis. For 2020/21 the allowance is £12,300 for individuals and £6,150 for trusts (being 50% of the allowance available to individuals). The OTS suggest that an annual allowance of between £2,000 and £4,000 may be a more appropriate de minimis. It is likely that any reduction in the allowance for individuals will be accompanied a corresponding reduction in the allowance for trusts.

How should trustees respond?

In view of the potential effect of these changes on both individuals and trusts, trustees may wish to consider the following actions:

  • Whether any taxable trust gains can be crystallised now to take advantage of the trust’s current rates and allowances, either by way of a disposal of the asset or by way of a distribution of the asset to a beneficiary.
  • For non-UK resident trusts with a UK domiciled settlor, whether there is any benefit in crystallising non-UK gains which will be taxed on the settlor under anti-avoidance legislation (s86) prior to any changes so that the gains are taxed on the settlor at current rates and using current allowances.
  • For non-UK resident trusts, whether there is any benefit in washing out pools of historic trust gains (s87 pools) to UK resident beneficiaries to take advantage of the opportunity for them to pay tax on the matched gains at current rates and using current allowances. Under current legislation, a supplementary charge is payable on gains which arose in tax years before the immediately preceding year at a maximum rate of 12%. This charge is calculated as a percentage of the rate of tax applied to the disposal, so there is a risk that an increased tax rate could lead to a correspondingly increased supplementary charge. Washing out historic gains now could be a way to secure both the tax charge and the supplementary charge at current rates.
  • For planned new settlements of assets within the charge to CGT, whether it is beneficial to not claim holdover relief (where it is otherwise available) in order to crystallise the gain now at current rates.

The legislation on these matters is very complex, particularly in relation to offshore trusts, and specialist tax advice is recommended. It is essential for trustees to consider the overall position of trust, settlor and beneficiaries and what meets the overall objectives of the trust and the trustees fiduciary responsibilities. Overseas tax issues should always be considered as part of any possible action and transactions.

Next steps

The OTS recommendations are just that – recommendations. It is for the Government to decide tax policy so it is not possible to predict which, if any, of the recommendations may be enacted and when this would happen.

Given the high profile of the OTS recommendations tailored advice should always be taken based on the circumstances of the individual and/or trust concerned and the above is just an overview of possibilities and is not exhaustive. The Government could legislate anti forestalling provisions which remove the benefit of any actions undertaken, therefore caution is required.

Currently we know the 2020/21 CGT rates and this enables the tax cost of a transaction to be calculated and planned. We also know that there is going to be a Spring 2021 Budget and that this may see announcements enacted either from that date or the start of the next tax year. We await a date for the Chancellor’s UK budget although the Scottish Government has announced that its budget for 2021/22 will be published on 28 January 2021.

Now is therefore the time to review trust and individual affairs, to consider the options and to move forward with strategic wealth protection and planning. To enquire about any aspects of the OTS report please contact with your usual Azets advisor or a member of our private client team

 

Please note: This note is based on the law as at 11 November 2020 and the OTS first report into Capital Gains Tax published on 11 November 2020. This note does not cover all aspects of the subject.

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Peter Goodman

Partner London Bridge
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