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Why some taxpayers will see their capital gains allowance cut to just £300

Jeremy Hunt
Jeremy Hunt

Capital gains tax allowance will be slashed from April next year but some taxpayers will be punished more than others.

The allowance will fall from £12,300 to £6,000 in April 2023 before being halved again in April 2024. However, trustees, those who manage a trust on behalf of beneficiaries, face more punitive cuts. Some will see the allowance fall to as low as £300.

Trustees can currently make gains of up to £6,150 on assets taken out of or put into the trust before paying capital gains tax. But their allowance will reduce in line with the Government’s changes, and from April it will be worth only £3,000 and then £1,500 from 2024.

Any gains above these amounts are charged 20pc tax, or 28pc for property. This means no tax would be due this year on a £6,000 gain on shares held in a trust but in 2023 the trustee would pay £600 in tax and £900 in 2024.

Some trustees' allowance will be smaller still. If the trust’s creator, or settlor, has set up multiple trusts, the allowance will be divided equally between the number of trusts, up to a maximum of five – leaving some trustees with a CGT allowance of just £300.

In this case if the assets grew by £10,000, trustees would lose almost £2,000 of that gain to HM Revenue & Customs.

Jamie Mathieson of law firm JMW Solicitors said: “Not mentioned in the Budget is the knock-on effect this change will have on trustees, who currently benefit from a CGT allowance of half that of an individual.”

Simon Jennings, a member of the Society of Estate and Trust Practitioners, a body of advisers, said government cuts will give rise to “fictitious gains” that individuals then have to pay tax on.

The CGT allowance is lower for trustees to prevent beneficiaries from effectively receiving double relief on trust gains as well as their own, according to the Treasury.

Trusts are often used to preserve family wealth for future generations, Mr Jennings said, but the government is increasingly treating them as “instruments of dubious tax avoidance”.

He said: “Trusts have been penalised by successive governments without any really good reason – such as the requirements for trusts to register with HMRC. This placed a heavier burden on trustees particularly for small trusts and trusts for minors.”

The September deadline

Trustees were told to register trusts with HMRC before September 1 or face a £5,000 penalty. The tax office now holds information on some 200,000 trusts but it is estimated that hundreds of thousands have still yet to register.

Mr Mathieson said: “Trusts are used by all types of people and are not just a ploy to avoid tax contrary to what the Government or HMRC might say. Trusts are generally used to hold family wealth, enabling it to pass down sensibly to the next generation and to not tempt them to extravagance. For example with divorce now very common, trusts may be used by parents to shelter family wealth to keep it in the bloodline. Trusts can also be helpful where there are disabled children or family members who need a trust to protect them for the future.”

The amount of CGT paid by trusts increased 31pc last year to hit £810m, according to data from HMRC, although it noted the annual receipts were “volatile” and do not necessarily suggest an upward trend.

Despite the reduction to the CGT allowance, Mr Mathieson said trusts could still be highly tax efficient. “The IHT savings are the real winner here,” he said. “IHT will not be going away anytime soon so the older generation would likely see the sense in reducing their overall IHT burden in the future.”