CGT Annual Allowance: What you need to know!

 In Probate, Tax, Trusts

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In the November 2022 Autumn Statement, the Chancellor of the Exchequer announced that the CGT annual exempt amount (the Annual Allowance) is to be reduced over the next few years, starting with the tax year 2023/2024.

In this article, we consider the extent to which a trustee (and a personal representative) is entitled to the Annual Allowance and the effect of the reduction over the coming years.

First, though, let us look at the current rates of CGT (for UK resident taxpayers), and the amount of the Annual Allowance.

Table 1: CGT Rates

Asset disposed of Basic Rate Taxpayers Higher Rate Taxpayers,
Trusts and Estates
UK Residential Property 18% 28%
Other assets subject to CGT 10% 20%

Table 2: Annual Allowances

Tax Year Annual Allowance
Individual,Personal Representatives, and * Trustees of Disabled Person’s Trusts * Trustees of other trusts
2022/2023 £12,300 £6,150
2023/2024 £6,000 £3,000
2024/2025 £3,000 £1,500
2025/2026 onwards To be decided To be decided

Table 2: Annual Allowances

The extent to which the Annual Allowance is available to trustees and personal representatives is discussed below.

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* The amount of the Annual Allowance shown is the maximum available to trustees. The amount available to the trustees of individual trusts is discussed in detail below.

Personal Representatives

Personal representatives (PRs) includes both executors and administrators administering the estate of a deceased person.

PRs have a CGT Annual Allowance during the year of death and the following 2 tax years only (s.1K(7) Taxation of Chargeable Gains Act 1992 – TCGA 1992). The PR’s Annual Allowance is equal to an individual’s Annual Allowance, as identified in Table 2. Unlike the trustee’s Annual Allowance, that of the PR is not reduced by any trusts that the deceased may have made, or that arise on their death.

Example:

  • D dies on 31 October 2022.
  • Tax year 2022/2023 – PRs have Annual Allowance of £12,300 which applies for disposals of assets subject to CGT from 1 November 2022 to 5 April 2023, inclusive.
  • Tax year 2023/2024 – PRs have Annual Allowance of £6,000.
  • Tax year 2024/2025 – PRs have Annual Allowance of £3,000.
  • Tax years 2025/2026 et seq – PRs have no Annual Allowance.

In relation to any trusts that arise under the deceased’s will or intestacy, see also under “How many settlements has the settlor made?”, below.

Trustees

When identifying the level of Annual Allowance available to the trustees of any particular trust, it is necessary to consider the following:

1. Is the trust a bare trust?

Where trustees hold assets on bare trust, i.e. only for:

  • For a person absolutely entitled as against the trustee, or
  • For any person who would be so entitled but for being an infant or other person under disability (or for 2 or more persons who are or would be jointly so entitled),

the trust is looked through, with all acquisitions and or disposals being treated for CGT purposes as having been made by those persons for whom the trustees hold such assets (s.60 TCGA 1992).

2. Is it within the definition of a settlement for a disabled person (a Disabled Person’s Trust)? see Schedule 1C, TCGA 1992, paras 2-4

It is important to identify if a trust is a Disabled Person’s Trust. The starting point of the trustees’ Annual Allowance for such trusts is based upon the amount of the allowance available to an individual, whereas for the trustees of any other trust the starting point for the allowance is half that amount.
Unlike for inheritance tax (IHT), for CGT it is necessary to identify if a trust qualifies as a Disabled Person’s Trust on an annual basis – i.e. whether for any tax year if, for the whole or part of that year, settled property is held on trusts which secure that, during the lifetime of a disabled person, the property and income tests of Schedule 1C TCGA 1992, para. 3 are met.

For the purposes of Schedule 1C TCGA 1992, para 3, the definition of a Disabled Person is taken from Schedule 1A Finance Act 2005, namely a person who is:

  • by reason of mental disorder within the meaning of the Mental Health Act 1983 incapable of administering his or her property or managing his or her affairs,
  • in receipt of attendance allowance,
  • in receipt of a disability living allowance by virtue of entitlement to—
    • the care component at the highest or middle rate, or
    • the mobility component at the higher rate,
  • in receipt of disability assistance for children and young people by virtue of entitlement to—
    • the care component at the highest or middle rate in accordance with regulations made under section 31 of the SS(S)A 2018, or
    • the mobility component at the higher rate in accordance with regulations made under section 31 of the SS(S)A 2018,
  • in receipt of personal independence payment,
  • in receipt of disability assistance for working age people by virtue of entitlement to—
    • the daily living component at the standard or enhanced rate in accordance with regulations made under section 31 of the SS(S)A 2018, or
    • the mobility component in accordance with regulations made under section 31 of the SS(S)A 2018,
  • in receipt of an increased disablement pension,
  • in receipt of constant attendance allowance, or
  • in receipt of armed forces independence payment.

3. How many settlements has the settlor made?

Since 5 April 2019, the amount of the trustees’ Annual Allowance for any particular trust is calculated by reference to the total number of “Qualifying UK Settlements” (Schedule 1C TCGA 1992, para 7.(1)) made by the settlor of that trust, and which subsist in the relevant tax year (either during the whole tax year or any part thereof).

Qualifying UK Settlement includes:

  • a Disabled Person’s Trust, and
  • a trust, the trustees of which are resident in the UK during the tax year (or any part thereof) and the trust fund is not held for charitable or pension purposes (see Schedule 1C TCGA 1992, paras 7.(2) and 7.(3) respectively).The above does not exclude, for example, pilot trusts or life policy trusts.

The Annual Allowance of the year in question is divided by the total number of Qualifying UK Settlements that subsist during any part of that tax year, with the trustees of:

  • each Disabled Person’s Trust being entitled to the relevant proportion of the individual’s Annual Allowance; and
  • each other trust being entitled to the relevant proportion of half of an individual’s Annual Allowance;
  • in either case subject to the Annual Allowance available to the trustees of any particular trust not being less than 10% of an individual’s Annual Allowance.

(see Table 3 for examples)

The apportionment of the Annual Allowance between trusts occurs regardless of whether any disposals are made in each trust.

Where trusts arise on the death of an individual, the Annual Allowance available to the trustees of those trusts will need to take into account the number of any trusts made by the settlor during their lifetime and which subsist during the relevant tax year (or any part thereof).

Exceptions: However, the following are specifically excluded from the definition of “Qualifying UK Settlement” and will have an Annual Allowance equal to an individual’s allowance, and half of an individual’s allowance, respectively:

  • a Disabled Person’s Trust made before 10 March 1981; and
  • any other trust made before 6 June 1978.

Table 3: Annual Allowance where multiple trusts by same settlor

Settlor Types of Trust Number of trusts in year Annual Allowance (2022/2023) Annual Allowance (2023/2024) Annual Allowance (2024/2025)
A Disabled Person’s Trusts 0 N/A N/A N/A
Other Trusts 1 £6,150 £3,000 £1,500
B Disabled Person’s Trusts 1 £3,075 £1,500 £750
Other Trusts 3 £1,538 £750 £375
C Disabled Person’s Trusts 2 £1,538 £750 £375
Other Trusts 6 £1,230 £600 £300
D Disabled Person’s Trusts 1 £1,230 £600 £300
Other Trusts 14 £1,230 £600 £300

Care: Where, following a death, a trust is created by a variation to which s.62(6) TCGA 1992 applies, in most situations the settlor for CGT purposes is the original beneficiary(s) who created the trust in the variation. However, if the benefit settled was already settled by the will or intestacy of the deceased, or otherwise, the deceased will be the settlor for CGT purposes – s.68C.(5) TCGA 1992, and the Annual Allowance to the trustees of such trust will be identified accordingly.

4. Is the settlement a joint settlement?

Where there is more than one settlor of a trust, the trustees are entitled to just one Annual Allowance, which is calculated by reference to the settlor who has made the most trusts. For example: if Settlor A and Settlor C in Table 3 were the joint settlors of a trust, the trustees’ Annual Allowance for that trust would be that of Settlor C.

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