Advanced Taxation (UK) · Inheritance tax: transfers to and from trusts and property within trusts

CGT and Income Tax Interaction with Trusts

Updated 11 October 2026 · Fact-checked

Gifting an asset to a trust is a CGT disposal at market value. Holdover relief can defer the gain by reducing the trustees' base cost. Trustees pay CGT at 24% after a reduced annual exempt amount. Discretionary trust income is taxed at 45%, or 39.35% for dividends.

Understand CGT and Income Tax Interaction with Trusts

A trust is a separate taxpayer for CGT and income tax. The trustees are taxed, not the trust as a person. So every time an asset moves into or out of a trust, you must think about CGT as well as IHT.

When someone puts an asset into a trust, they make a disposal for CGT. It is deemed to be at market value, even though nothing is paid. This applies whether the trust is discretionary or an interest in possession trust. The settlor may have a large gain with no cash to pay the tax.

Holdover relief fixes this. The gain is not taxed on the donor now. Instead it is deducted from the trustees' base cost. The tax is deferred until the trustees later sell. There are two routes:

Under s260, relief is available on any type of asset if the gift is immediately chargeable to IHT (a chargeable lifetime transfer). Most gifts to a discretionary trust fall here.
Where the gift is not immediately chargeable to IHT, for example a PET, relief under s165 is available only if the asset is a qualifying business asset. Examples are assets used in a trade and shares in an unquoted trading company.

Holdover is not available where the trust is settlor-interested. That means the settlor, their spouse or civil partner, or their minor children (and certain other relatives) can benefit from the trust. Both parties must make a joint election.

Trustees pay CGT at the higher rate, 24%, on all their gains. Trustees cannot use the lower 18% rate.

The tax tables give only the individual annual exempt amount of £3,000. They do not give the trustee figure, so you must know it. The trustee annual exempt amount is half the individual amount, so £1,500. Where the same settlor has made other trusts, the amount is shared between them. Each trust gets at least one-fifth of the individual amount, which is £600. A question will often state the figure to use, so follow the question if it does.

Trust income is taxed at trust rates. For a discretionary trust, the rate is 45% on non-dividend income and 39.35% on dividends, which are the additional rates in the tables. A small standard rate band at the basic rates may apply, so read the question. An interest in possession trust pays basic rate: 20% on other income and 8.75% on dividends. When assets leave a trust, the trustees are treated as disposing of them at market value, and holdover may again apply.

Key rules to remember

Gift into trust: deemed proceeds: Deemed proceeds = market value at date of transfer; Applies to any gift into a trust, even with no payment. The donor is chargeable on the gain.
Holdover relief effect: Trustees' base cost = market value − gain held over; Donor's chargeable gain becomes nil if the relief is claimed in full, so their annual exempt amount is not used on that gain.
Trustee CGT: (Gains − trustee annual exempt amount) × 24%; The tax tables give only the individual £3,000. Know that the trustee amount is half, £1,500, unless the question states a figure. It is shared between trusts by the same settlor, with a minimum of one-fifth of £3,000 (£600) per trust.
Discretionary trust income tax rates: Non-dividend income 45%; dividends 39.35%; These are the additional rates in the tax tables. A standard rate band may apply to the first slice of income, so read the question.
Interest in possession trust rates: Non-dividend income 20%; dividends 8.75%; Basic rate and dividend ordinary rate.
Holdover conditions: Gift immediately chargeable to IHT (s260): any asset. Gift not immediately chargeable (e.g. a PET): qualifying business asset only (s165). No relief if settlor-interested.; A joint election by donor and trustees is needed. Settlor-interested means the settlor, spouse or civil partner, or minor children (and certain other relatives) can benefit.

How to solve CGT and Income Tax Interaction with Trusts questions

Use this order for any question on trusts, CGT and income tax. Keep each tax separate.

1Identify the trust type: discretionary or interest in possession. This sets the income tax rates and the IHT treatment.
2Identify the event: gift into the trust, sale by trustees, or asset leaving the trust to a beneficiary.
3Compute the gain at market value on the deemed disposal. Deduct cost and allowable expenses.
4Check holdover: is the gift immediately chargeable to IHT (any asset qualifies)? If not, is it a qualifying business asset? Is the trust settlor-interested? If relief applies, reduce the donor's gain and the trustees' base cost.
5For trustee sales, deduct the trustee annual exempt amount and apply 24% to the remainder. Use the figure in the question. If none is given, use £1,500 and note that it is shared if the settlor made other trusts.
6For income, apply trust rates: 45% and 39.35% for discretionary trusts, or 20% and 8.75% for interest in possession trusts.
7State the tax saved, deferred or payable, and mention the IHT effect briefly.

Quickest way: Four-line trust tax check

When to use it: When time is short and the question asks for a tax effect or advice rather than a full computation.

Write: Gift into trust = disposal at market value.
Ask: immediately chargeable to IHT, or a qualifying business asset, and not settlor-interested? If yes, holdover cuts base cost.
Write trustee gains: less the trustee annual exempt amount (£1,500 unless the question says otherwise or other trusts share it), times 24%.
Write trust income: 45% non-dividend, 39.35% dividend for discretionary; 20% and 8.75% for interest in possession.

Common mistakes in CGT and Income Tax Interaction with Trusts

Using the individual annual exempt amount of £3,000 for trustees.
Students remember the figure in the tax tables and forget trustees get less.
Fix: The tables do not give the trustee figure, so learn it. Use half, £1,500, unless the question states a figure. If the settlor made other trusts, the amount is shared, with a minimum of £600 per trust.
Applying 18% CGT to part of a trustee gain.
Students copy the individual's band approach.
Fix: Trustees always pay 24%. No lower rate band applies.
Claiming holdover on a gift to a settlor-interested trust.
The gift looks like any other chargeable lifetime transfer.
Fix: Check whether the settlor, their spouse or civil partner, or their minor children (and certain other relatives) can benefit. If so, no relief is available.
Forgetting that a gift into a trust is a CGT disposal because no money is paid.
Students link gifts to IHT only.
Fix: Always compute the gain at market value. Then consider holdover.
Using the holdover gain as the trustees' base cost instead of deducting it.
Confusion about which figure is reduced.
Fix: Trustees' base cost = market value − gain held over.
Using 45% on all discretionary trust income including dividends.
Students remember only the additional rate.
Fix: Dividends use 39.35%. Non-dividend income uses 45%.

Worked examples

Example 1

Asha gives shares in an unquoted trading company to a new discretionary trust. Shares cost £40,000 and are worth £240,000 at the date of gift. Asha, Asha's spouse and Asha's minor children cannot benefit. A joint holdover election is made. Later the trustees sell the shares for £300,000. Asha has made no other trusts, and the question tells you to use a trustee annual exempt amount of £1,500 (half of £3,000). Ignore costs and other gains. Compute Asha's gain, the trustees' base cost and the trustees' CGT on sale.

Show the solution

Asha's gain: £240,000 − £40,000 = £200,000.
Transfer is to a discretionary trust, so it is immediately chargeable to IHT. Holdover under s260 is available on any asset. The trust is not settlor-interested, so the relief applies.
Gain held over: £200,000. Asha's chargeable gain becomes nil.
Trustees' base cost: £240,000 − £200,000 = £40,000.
Trustees' gain on sale: £300,000 − £40,000 = £260,000.
Deduct trustee annual exempt amount: £260,000 − £1,500 = £258,500. The full £1,500 is used because no other trusts share it.
CGT at 24%: £258,500 × 24% = £62,040.

Answer: Asha's gain is nil after holdover. Trustees' base cost is £40,000. Trustees' CGT on the later sale is £62,040.

Example 2

A discretionary trust receives property income of £10,000 and dividends of £4,000 (gross) in the year. Ignore the trust standard rate band and trust expenses. Compute the income tax payable by the trustees.

Show the solution

Identify trust type: discretionary, so the additional rates apply.
Property income: £10,000 × 45% = £4,500.
Dividends: £4,000 × 39.35% = £1,574.
Total tax: £4,500 + £1,574 = £6,074.

Answer: The trustees' income tax is £6,074. In the exam, apply any standard rate band given in the question first.

Exam tips

Write the trust type at the top of your answer. Marks for rates depend on it.
Show the holdover calculation in two lines: gain held over, then new base cost. Markers follow these steps.
The tax tables do not give the trustee annual exempt amount. Use the figure in the question. If none is given, state £1,500 as half of £3,000 and say you have halved it. Mention sharing if the settlor made other trusts.
Check whether the settlor, their spouse or civil partner, or their minor children can benefit before claiming holdover. Scenario clues like 'retains a right to income' matter.
In advice questions, link to IHT. Mention that holdover defers tax and does not remove it, and that the trustees may face a later liability.

Practice questions from Inheritance tax: transfers to and from trusts and property within trusts

CGT and Income Tax Interaction with Trusts in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CMA FinalMeaning and Types of Trusts for Income Tax

CGT and Income Tax Interaction with Trusts: frequently asked questions

How does gift holdover relief work for trusts?

The donor's gain on the gift is deferred. It is deducted from the trustees' base cost, so the gain is taxed when the trustees later sell. The donor and the trustees must make a joint election.

What CGT rate and annual exempt amount apply to trustees?

Trustees pay CGT at 24%. The tax tables give only the individual £3,000. The trustee amount is half, so £1,500, unless the question states a figure. It is shared where the same settlor made more than one trust, with a minimum of one-fifth of £3,000 (£600) per trust.

What income tax rates apply to a discretionary trust?

Discretionary trust income is taxed at 45%, or 39.35% for dividends. A standard rate band may apply to the first slice, so read the question carefully.

Can I claim holdover when gifting any asset to a trust?

Yes, if the gift is immediately chargeable to IHT, as with most gifts to a discretionary trust. Relief under s260 then applies to any asset. If the gift is not immediately chargeable, such as a PET, relief under s165 needs a qualifying business asset. No relief is available if the trust is settlor-interested.