Advanced Taxation (UK) · Capital gains tax and trusts

Types of Trust and CGT on Transfers into Trust

Updated 11 October 2026

A trust is an arrangement where trustees hold assets for beneficiaries. Main types are bare, interest in possession and discretionary. A transfer into trust is a CGT disposal at market value. Holdover relief can defer the gain if the asset is a qualifying business asset or the transfer is a chargeable lifetime transfer for IHT (e.g. a discretionary trust).

Understand Trusts: Types, Creation and CGT on Transfers

A trust has a settlor who puts assets in, trustees who hold legal title and manage them, and beneficiaries who benefit. The trustees are treated as a single continuing body of persons. They are treated as UK resident or not under special rules, which you must check in the question.

There are three types you must know. In a bare trust, the beneficiary is absolutely entitled and can call for the asset. For CGT, the beneficiary is treated as owning the asset. In an interest in possession trust, one person (the life tenant) is entitled to the income as it arises, and someone else gets the capital later. In a discretionary trust, the trustees decide who gets income and capital and when.

When the settlor transfers an asset to a trust, it is a disposal for CGT. This is true even though no money changes hands. The disposal is at market value because the settlor and trustees are connected persons. The settlor is taxed on the gain. If the transfer gives a loss, the rule for connected persons applies: losses on disposals to connected persons can only be set against gains on disposals to the same connected person. Here that means gains on other disposals to the same trustees.

Gift holdover relief can defer the gain. The relief is available on a gift of a business asset. It is also available when the transfer is a chargeable lifetime transfer for IHT, such as a transfer into a discretionary trust. In both cases holdover is denied where the trust is settlor-interested, that is, where the settlor, their spouse or their minor children have an interest in the trust (s169B TCGA 1992). The claim is made jointly by the settlor and the trustees. With holdover, the settlor's gain is cut and the trustees take the asset at market value less the held-over gain.

Trustees get an annual exempt amount for the gains they realise. The tax tables give only the individual figure of £3,000. The trustee amount is not in the tables. You work it out as half of the individual amount, which is £1,500. Where the same settlor has made several trusts, the £1,500 is divided by the number of trusts the settlor made. Each trust still gets at least one tenth of the individual amount, which is £300. Trustees pay CGT at the higher rate, 24% on the assumed rates, so there is no basic rate band to use.

Key rules to remember

Settlor's disposal value: Proceeds = market value at date of transfer; Settlor and trustees are connected, so market value applies even for a gift.
Settlor's chargeable gain: Gain = market value − cost (and enhancement costs) − held-over gain (if claimed); Holdover is claimed jointly by the settlor and trustees. It is denied where the settlor, spouse or minor children have an interest in the trust (s169B). This applies to business-asset claims and to claims for chargeable lifetime transfers. Apply the settlor's annual exempt amount only to any gain left after holdover.
Trustees' base cost after holdover: Base cost = market value at transfer − held-over gain; The deferred gain comes back into charge when the trustees later sell.
Trustee annual exempt amount: £3,000 × ½ = £1,500 (for one trust); The tax tables give only the individual figure of £3,000. You must know that trustees get half. Where the settlor made several trusts, divide £1,500 by the number of trusts, but each trust gets at least one tenth of £3,000, which is £300.
Trustee CGT rate: 24%; Trustees pay the higher rate. The tables show 18% and 24% as the two rates.
Trustee CGT payable: (Gains − losses − £1,500) × 24%; Apply the annual exempt amount before the rate. BADR at 14% may apply if the conditions are met.

How to solve Trusts: Types, Creation and CGT on Transfers questions

Use this order for any question on transfers into trust. It keeps the marks for each part of the answer.

1Identify the type of trust: bare, interest in possession or discretionary. State it, as this decides who is taxed.
2Decide if there is a disposal. A transfer into a bare trust is generally treated as a transfer to the beneficiary. Into the other trusts, the settlor makes a disposal.
3Use market value as the disposal proceeds. Say why: the settlor and trustees are connected.
4Compute the gain: market value less cost and allowable expenditure.
5Check if holdover relief is available. Look for a business asset or a chargeable lifetime transfer for IHT. Holdover is denied if the settlor, spouse or minor children have an interest in the trust (s169B), whichever type of claim it is. The claim is made jointly by the settlor and trustees.
6Deduct the held-over gain from the settlor's gain and from the trustees' base cost.
7Apply the settlor's annual exempt amount only to any gain remaining after holdover. Then apply the rate that applies to the settlor's income level (18% or 24%).
8Where the trustees later sell, apply the trustee annual exempt amount (£1,500 normally, or less if the settlor made several trusts, but never below £300 per trust) and the 24% rate.

Quickest way: Five-line trust transfer check

When to use it: Use this when time is short and you need to score the core marks on a transfer into trust.

Write the trust type and the key disposal rule in one line.
Put market value less cost to get the gain.
State if holdover applies, and why.
Deduct the held-over gain, and give the trustees' reduced base cost.
Set out the settlor's AEA and rate, or trustees' £1,500 and 24%.

Common mistakes in Trusts: Types, Creation and CGT on Transfers

Using the cost or the nil value as proceeds when an asset is gifted to a trust.
Students think no money means no gain.
Fix: Always use market value. The settlor and trustees are connected persons.
Claiming holdover relief on a transfer into a trust without checking the conditions, including whether the settlor has an interest.
Students recall that gifts qualify for holdover but forget the conditions and the settlor-interested bar.
Fix: Check that the asset is a business asset or that the transfer is chargeable for IHT, such as a discretionary trust transfer. Then check that the settlor, spouse and minor children have no interest in the trust (s169B). Say the condition in your answer.
Giving the trustees the individual's £3,000 annual exempt amount.
Students recall the individual figure from earlier papers.
Fix: Use half: £1,500. If the question says the settlor made several trusts, divide £1,500 by the number of trusts, with a minimum of £300 for each trust.
Applying the basic rate of 18% to trustees' gains.
Students treat the trust like a low-income individual.
Fix: Trustees pay 24%. There is no basic rate band for them.
Forgetting to reduce the trustees' base cost by the held-over gain.
Students stop once the settlor's gain is computed.
Fix: Base cost = market value less held-over gain. Always show this line.
Treating a bare trust transfer as a disposal to a separate taxpayer.
Students apply the same rules to every trust.
Fix: For a bare trust the beneficiary is treated as the owner, so the trust is ignored for CGT.

Worked examples

Example 1

Priya transfers shares in her unquoted trading company to a discretionary trust. The trust is not settlor-interested. Market value is £400,000 and cost was £100,000. Priya and the trustees make a joint holdover claim. The trustees later sell for £450,000 in 2025/26 and have no other gains. Compute the gain on transfer and the trustees' CGT payable. Ignore BADR.

Show the solution

The transfer is a disposal at market value of £400,000.
Gain before relief: £400,000 − £100,000 = £300,000.
The shares are business assets, and the transfer is also a chargeable lifetime transfer, so holdover is available on either ground. The trust is not settlor-interested. Priya and the trustees make a joint claim, so Priya's gain after holdover is nil and no annual exempt amount is needed.
The trustees' base cost is £400,000 − £300,000 = £100,000. The held-over gain of £300,000 is therefore within the trustees' gain on sale.
Trustees' gain on sale: £450,000 − £100,000 = £350,000.
Deduct trustee annual exempt amount: £350,000 − £1,500 = £348,500.
Tax at 24%: £348,500 × 24% = £83,640.

Answer: Priya's gain after holdover is nil. The trustees' gain is £350,000 and CGT payable is £83,640.

Example 2

Mark transfers a quoted share portfolio to a discretionary trust that is not settlor-interested. Market value is £90,000 and cost was £60,000. Mark has made no other disposals in 2025/26 and pays higher rate tax. Explain whether holdover applies and compute his CGT.

Show the solution

The transfer is a disposal at market value of £90,000.
Gain: £90,000 − £60,000 = £30,000.
Quoted shares are not business assets. But the transfer to a discretionary trust is a chargeable lifetime transfer for IHT, so holdover is available if Mark and the trustees make a joint claim.
If holdover is claimed, Mark's gain is nil. Trustees take base cost of £90,000 − £30,000 = £60,000.
If no claim is made, the annual exempt amount applies to the gain that remains, which is the full £30,000: £30,000 − £3,000 = £27,000.
Tax at 24% as Mark is a higher rate taxpayer: £27,000 × 24% = £6,480.

Answer: Holdover is available because the transfer is a chargeable lifetime transfer. With a joint claim, his CGT is nil. Without it, the gain is £27,000 after the annual exempt amount and the tax is £6,480.

Exam tips

Write the trust type first. Markers give marks for correct classification before any calculation.
Always state why market value is used: the settlor and trustees are connected persons.
Show the trustees' reduced base cost on a separate line. It is easy marks and lost often.
Use the tax tables given in the exam for the rates and the £3,000 figure. State the half calculation to reach £1,500.
If the question asks you to advise, compare holdover with paying tax now and mention the cash flow.

Practice questions from Capital gains tax and trusts

Trusts: Types, Creation and CGT on Transfers: frequently asked questions

What are the main types of trust in ATX?

They are bare trusts, interest in possession trusts and discretionary trusts. In a bare trust the beneficiary is absolutely entitled. In an interest in possession trust one person has the income right. In a discretionary trust the trustees choose who benefits.

Is a transfer of assets into a trust a CGT disposal?

Yes, for interest in possession and discretionary trusts. It is a disposal at market value because the settlor and trustees are connected. A transfer into a bare trust is treated as a transfer to the beneficiary.

What is the trustee annual exempt amount?

The tax tables give only the individual amount of £3,000. The trustee amount is half of that, which is £1,500. Where the same settlor has made several trusts, the £1,500 is divided by the number of trusts, but each trust gets at least one tenth of the individual amount, which is £300.

What CGT rate do trustees pay?

Trustees pay the higher rate. The tax tables show 18% and 24%, so you use 24%. Business asset disposal relief, if available, is charged at 14%.