Given the results of the recent election there has been several speculations around Labour’s plans with capital gains tax (‘CGT’) and how the new government will increase the CGT rate, potentially bringing in a tax charging structure which will align the rates with income tax rates.
Given the uncertainty around CGT reliefs and others, like Business Property Relief (‘BPR’) for inheritance tax (‘IHT’), clients, certainly those with trading business interests, are increasingly considering whether to crystallise gains and reliefs before any potential tax changes come into force. One option is to transfer these assets into trust and we consider this further below.
Transferring assets into trust?
Using trusts can be a strategic way to manage and protect your assets. Here are some key benefits:
- Reduce IHT Liability: By placing assets into trusts, you can lower the value of your estate, potentially reducing or even eliminating the IHT liability as the asset will sit outside your estate after a survivorship period. Care needs to be taken not to trigger any tax charges on inception.
- Manage Assets for Children: Trusts allow you to manage property or money on behalf of your children until they reach adulthood and beyond. Additionally, trusts keep these assets out of the child’s estate, preventing an increase in their personal wealth and future tax burden. Essentially the control stays with the settlors i.e. parents / grandparents.
- Protect Against Relationship or Financial Breakdown: Trusts can safeguard your estate and your children from the consequences of financial troubles e,g. bankruptcy, divorce.
- Provide for Your Spouse but protecting capital: Trusts can ensure that the spouse is financially supported while preserving the capital to pass on to children / ultimate beneficiaries.
- Removes the Probate burden: Assets placed in trust are immediately available after death, removing the unwanted wait for a Grant of Probate and ensuring the next generation have access to monies should they need it i.e. for IHT or ongoing family expenses.
Should you consider triggering a dry tax charge now?
By triggering a dry tax charge now, you can potentially lock in current tax rates, secure valuable reliefs, and enhance estate planning benefits. This is of course not without risk when we are unaware of legislation on the matter, and if anti-forestalling rules are brought in on 30th October and planning of this nature has been carried out, then the cost to any client will be the dry tax charge, advisory and legal fees in relation to the planning.
- CGT Rates: Transferring assets like business shares into a trust can defer the CGT liability until the business is sold. However, with potential CGT rate increases on the horizon, it may be advantageous to trigger the CGT charge now. This allows clients to benefit from the current lower CGT rates, potentially saving on future taxes.
- Increase Asset Base Cost: Triggering the CGT now increases the asset’s base cost for the new owner i.e. the trust. This could result in lower overall taxes if CGT rates rise in the future, making the current lower rates more favourable.
- Utilise Existing Tax Reliefs: There are potential changes in the Autumn Budget that may restrict or remove reliefs like BPR and Agricultural Property Relief (‘APR’). Transferring qualifying assets into a trust now in anticipation of a future sale can secure these reliefs before any unfavourable changes.
- IHT Benefits: Trusts can offer significant IHT advantages by reducing future tax exposure and protecting wealth for future beneficiaries.
If you would like to discuss CGT, BPR, APR, your business interests or IHT more generally, please do not hesitate to contact Trusted Tax Advice, and certainly before 30th October 2024 budget day if you want to implement pre-budget planning!
