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Transfers to a trust: What are the capital gains tax implications?

by , 10 June 2015
Today, we're taking a look at resident trusts and capital gains tax (CGT).

We're going to look at some of the generic transactions involving trusts and the capital gains tax consequences of each!

To start off with, here's what we mean by transfers to a trust:

Assets transferred to a discretionary trust through a donation will give rise to a deemed disposal of the assets donated at their market value, which in turn will be the base cost of these assets to the trusts when capital gains tax is triggered at a future disposal.

Here are the rules that apply when we talk about disposal or distribution by the trust

Firstly, a disposal by the trust, resulting in a capital gain, will be taxed in the hands of the following parties:

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•  The resident beneficiary who has a vested right to the capital gain, either automatically (vested trust) or by the exercise of the trustees' discretion (discretionary trust); and who's not a minor child of the funder who donated the trust funds or where the funder hasn't retained certain powers over the trust.

•  The funder/donor of the trust where the capital gain hasn't vested in any of the beneficiaries at all or the capital gain has vested in a beneficiary who is either a non-resident or a minor child of the funder who has donated the trust assets or the trust was funded by a low-interest loan or if the settlor has retained certain powers. As indicated above, in the case of a low-interest loan only that portion of the gain equivalent to foregone interest can be taxed in the hands of the funder and the remainder is taxed in the trust.

•  The trust if none of the above applies.

Notice that the distribution of cash by a trust in any year after the capital gain giving rise to the cash was made won't attract capital gains tax because the gain was taxed when it was originally made.

Also, the distribution of income will not attract capital gain tax but will obviously be subject to normal tax!

You should know that if the trust distributes an asset, then it'll also give rise to CGT even if it's distributed in settlement of any entitlement to income or capital by the beneficiary. The base cost of the asset will be the market value at the time of the distribution if he disposes of it later.

Use this tip: A capital loss can't be given to a beneficiary or funder of the trust. But it can be set off against any gains made by the trust that aren't given to any other person. The excess loss must be carried forward to the following year.

Final word: Keep in mind that a change in identity of a trustee will not give rise to capital gains tax!


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