How a Charitable Trust Can Legally Avoid Capital Gains Tax

Imagine a charity that sells a donated painting for a hefty profit, only to see a chunk of that money disappear as Capital Gains Tax (CGT). That scenario feels unfair, right? The good news is that a properly structured charitable trust can sidestep CGT altogether - but you need to know the exact rules and the paperwork that makes it work.

Quick Takeaways

• CGT only applies when a chargeable asset is disposed of for non‑charitable purposes.
• Section168 of the Income Tax Act2007 gives charitable trusts an automatic exemption on gains from asset sales, provided the proceeds stay within the charitable purpose.
• Trustees must keep clear records, obtain a “charitable exemption” from HMRC, and ensure the assets were held for charitable purposes when acquired.
• Transferring assets to the trust before they appreciate, or gifting assets directly to an accredited charity, are two common ways to avoid any CGT liability.
• Common pitfalls include mixed‑use assets, inadequate documentation, and failing to claim the exemption within the required timeframe.

What Is Capital Gains Tax and Why Does It Matter for Charities?

In the UK, Capital Gains Tax is a tax on the profit made when you sell, exchange, or dispose of a chargeable asset - things like shares, property (that isn’t your main home), or valuable artwork. The gain is calculated by subtracting the asset’s original cost and allowable expenses from the sale price.

For most individuals and businesses, CGT reduces the net proceeds that can be reinvested. Charitable trusts, however, enjoy special rules because the law recognises their public benefit role.

Legal Framework That Gives Charitable Trusts a CGT Break

The cornerstone is Section168 of the Income Tax Act2007. This provision states that any gain arising from the disposal of an asset by a charity - or a trust that is recognised as a charity - is exempt from CGT, as long as the gain is used for the charity’s purposes.

In practice, the exemption works only when two conditions are met:

1. The asset must be held by the trust for a charitable purpose at the time of acquisition.
2. The proceeds of the sale must be kept within the trust and applied to the charitable objectives.

HM Revenue & Customs (HMRC) oversees the exemption. Trustees usually need to submit a Charitable Exemption Claim when the first CGT‑eligible disposal occurs, but the claim can be retrospective if the trust can prove the conditions were satisfied.

Four Proven Ways a Charitable Trust Avoids CGT

• Direct Gift of Appreciated Assets: A donor transfers a high‑value asset (e.g., shares, artwork) directly into the trust when the asset has already appreciated. Because the trust never owned the asset before the gift, there is no disposal event for the donor, and the trust’s future sale falls under Section168.
• Section168 Disposal by the Trust: The trust buys an asset, holds it, and later sells it. As long as the asset was bought for a charitable purpose and the gain stays in the trust, the sale is automatically exempt.
• Pre‑Sale Transfer to a Qualifying Charity: If a trust plans to sell an asset but wants a clean CGT line, it can transfer the asset to a registered charity (or to another charitable trust) shortly before disposal. The receiving charity’s own Section168 exemption covers the gain.
• Use of Gift Aid for Cash Donations: While Gift Aid itself doesn’t affect CGT, it can reduce the overall tax burden for donors, making the entire giving process smoother. Donors claim back tax on cash donations, which can free up extra cash to contribute assets directly to the trust.

Step‑by‑Step Checklist for Trustees

1. Confirm Charitable Status: Verify that the trust is recognised by HMRC as a charity. Registration with the Charity Commission (England & Wales) or Office of the Scottish Charity Regulator (OSCR) is mandatory.
2. Identify the Asset’s Purpose: Document that the asset was acquired to further a charitable purpose. Keep acquisition agreements, valuation reports, and board minutes.
3. Maintain Separate Accounts: Ensure the asset’s revenue and the resulting gain are recorded in the trust’s dedicated charity accounts, not mixed with other income.
4. Submit a Charitable Exemption Claim: When the first disposal occurs, fill out HMRC’s CGT exemption form (SA108) and attach evidence of charitable use.
5. Keep a Trail of the Proceeds: Use the gain to fund charitable projects, and retain receipts, invoices, and progress reports to prove the money stayed in the charitable purpose.
6. Review Mixed‑Use Assets: If an asset serves both charitable and non‑charitable activities (e.g., a rental property that also houses a community centre), allocate the gain proportionally. Only the charitable portion qualifies for exemption.
7. Conduct an Annual Tax Review: Have a qualified accountant check that all CGT‑related filings are correct and that the trust has claimed every applicable exemption.

Common Pitfalls and How to Dodge Them

• Using the Asset for Private Benefit: If a trustee or a donor personally benefits from the asset before donation, HMRC may deem the gain taxable. Keep personal use to an absolute minimum.
• Failing to Document Charitable Purpose: Without clear paperwork, HMRC will reject the exemption. Save board resolutions, purpose statements, and valuation notes.
• Mixing Funds: Depositing the gain into a general banking account that also holds commercial income can raise questions. Separate charitable and non‑charitable cash flows.
• Missing the Claim Deadline: The exemption claim must be filed with the same tax return as the disposal. Late claims can trigger penalties.
• Transferring Assets to Non‑Qualified Recipients: Only transfers to recognised charities or charitable trusts preserve the exemption. Double‑check the recipient’s charitable status.

Real‑World Example

Imagine the Charitable Trust for Youth Arts receives a donation of shares worth £200,000. The donor bought the shares five years earlier for £80,000.

1. The donor gifts the shares directly to the trust. No CGT is triggered for the donor because the transfer is a gift.
2. The trust holds the shares for three years, during which time the market pushes the value to £300,000.
3. The trust sells the shares to fund a new community studio. The gain is £220,000 (£300,000 sale price - £80,000 original cost).
4. Because the shares were held for a charitable purpose and the proceeds will be used for youth arts programs, the gain is exempt under Section168. The trust reports the disposal on SA108, submits supporting documents, and the gain is not taxed.

Result: the entire £300,000 can be deployed into the new studio, maximising impact for the community.

Quick Reference Table - When Does a Charitable Trust Get a CGT Exemption?

Final Thoughts

Skipping CGT isn’t about loopholes; it’s about using the law’s built‑in charitable exemptions correctly. By keeping thorough records, confirming the charitable purpose at every step, and filing the right forms with HMRC, a trust can turn what looks like a tax hit into full‑force funding for its mission.