Chapter: 2 - Inheritance Tax Mitigation: The Basics

Providing for children: Capital Gains Tax

2.10.5

The rule applying from 2006/07 to 2007/08 inclusive was similar to Income Tax where gains are made by trustees of a settlement under which a minor unmarried child of the settlor can benefit (and child includes a step-child).  In that case the gains are treated as those of the settlor and thus can attract any annual exemption otherwise available.  Any allowable losses or otherwise would attract tax at his marginal rate (TCGA 1992 s77, repealed from 2008/09).  As from 2008/09 the gains of a settlor-interested trust are assessed on the trustees. 

By contrast, if the assets are owned by the child absolutely, though because he is under age are vested legally in someone else as nominee or bare trustee, the gains arising on disposal are treated as those of the child and thus are capable of attracting his annual exemption and/or (before 2008/09) lower CGT rates of 10% or 20% rather than those of the parent.  As from 2008/09 there is a single rate of CGT of 18%, although there remains the advantage of the child’s annual exemption. This is something of an oddity though one of which many have historically taken, and continue to take, advantage.  The disadvantage of course is that come age 18 the child can call for transfer of the assets into his own name absolutely (see 3.4.2(c)).