Since The Chancellor surprised everyone by announcing significant reductions to the Annual Capital Gain Tax (CGT) allowance from 6th April 2023, as the only trust company offering a range of CGT-assessable Flexible Reversionary Trusts, Financial Advisers have (understandably) asked us for our thoughts on the impact of the changes on the WAY Inheritor Trusts.
• The personal CGT allowance is scheduled to reduce from the current £12,300 to £6,000 for the 2023/24 tax year and £3,000 for the 2024/25 tax year.
• The CGT allowance available to Trustees will, therefore, reduce from the current £6,150, to £3,000 for the 2023/24 tax year and £1,500 for the 2024/25 tax year.
The reduced CGT allowances will undoubtedly mean, more individuals and trusts will pay CGT from 6th April 2023, but how does this compare to assets held in trusts which are assessable to income tax?
Different Tax Regimes
According to HM Revenue & Customs (HMRC) data released in Summer 2022, there are 34 million Income Taxpayers in the U.K. By definition, they have used their individual Income Tax allowance and therefore any gains in the hands of the Beneficiaries will be taxed at 20%, 40% or 45%, depending on their tax bracket.
Compare this to only 323,000 individuals and trusts who paid CGT, which is equivalent to less than 1% of those who paid Income Tax!
As a result of frozen allowances, HMRC estimate that 235,000 more people (and presumably Trusts) will need to report capital gains in 2023/24, and the Chartered Institute of Tax estimate that 260,000 more people (and presumably Trusts) will have to complete self-assessment returns for the first time in 2023/24
The overwhelming majority of UK Taxpayers and Trustees will therefore still have a tax-free CGT allowance to utilise and with CGT rates of 10% for Basic Rate Taxpayers and 20% for Higher and Additional Rate Taxpayers and Trustees, it will still be more tax efficient to realise gains which are assessable to CGT than Income Tax, should their allowances be exhausted.
How does this work in practice?
Looking at the impact of the changes in monetary terms, reducing the CGT allowance for Trustees from £6,150 to £3,000 is a reduction of £3,150, so Trustees realising the same amount of gain in the 2023/24 and 2024/25 tax years, as in the 2022/23 tax year, would pay:
• 2023/24 tax year: an additional £630 (20% of £3,150)
• 2024/25 tax year; an additional £930 (20% of £4,650)
However, the Trustees of post-22nd March 2006* WAY Trusts, can transfer trust assets (investment units or shares), in-specie, to Beneficiaries and claim CGT Holdover Relief, which transfers the investment from the Trustees to the Beneficiaries, without any CGT consequences.
The Beneficiaries receive the investment units with all of the gain attached, but can then offset their personal CGT allowance against realised gains; an exercise that can be conducted over several tax years to mitigate CGT. With Personal CGT allowances double those of Trustees, it is more tax-efficient and could also halve the tax rate (if the recipient is a Basic Rate Income Taxpayer).
*when legislation changed to bring the WAY Inheritor Plans into the Relevant Property, Chargeable Lifetime Transfer, regime
Long term intergenerational tax planning
Appointments to Beneficiaries during or after the lifetime of the Settlor, exposes family wealth to life’s social impacts in the hands of the Beneficiary, should they go on to divorce, be declared bankrupt, or die themselves and leave an IHT assessable estate.
To achieve long-term, family wealth preservation, as Trustees, we would always advocate a loan from the Trust to the Beneficiary, over a direct appointment. A loan is an asset of the Trust and a debt to the recipient, which can protect the money from divorce, bankruptcy and further IHT assessment, for up to 125 years.
To find out more about the key to delivering both wealth preservation and intergenerational tax planning, get in touch with WAY Trustees Limited.