CG36300 - Life interests and interests in possession: Interests in possession: death and CGT
Death and trusts: special provisions
Introduction
TCGA92/S62
It has been a basic principle of Capital Gains Tax since 1971 that when someone dies
- there is no deemed disposal on death and therefore death is not an occasion of charge to CGT;
- the executors are deemed to acquire the property at the market value at the date of death. This value is therefore the cost for the CGT computations on any disposal by the executors;
-
if assets are transferred to legatees, including trustees of a new trust or an existing one
- there is no charge to CGT on the executors, and
- the legatees are treated as having acquired these assets at the time of the death and at the market value at the date of death.
Market value on death
There is a charge to Inheritance Tax on the whole of a person’s property when he or she dies, subject to certain exemptions and reliefs. Therefore there is not a charge to Capital Gains Tax as well.
If Inheritance Tax was paid on the occasion of death then the market value to be adopted is the value adopted for that tax. See CG32210+ and TCGA92/S274. Otherwise the market value to be adopted is as provided in TCGA92/S272. In this Manual guidance on market value is generally to be found in the sections dealing with the particular asset.
Death and trusts
Before 22 March 2006, for Inheritance Tax purposes, if a person has an interest in possession in settled property and dies, the value of the settled property in which he or she has the interest is treated as part of his or her property, and taxed accordingly. Therefore, where a person with such an interest dies, the treatment for Capital Gains Tax purposes is similar to that where an individual dies. There is no charge on the death, and the future computations are based on the value at death.
Certain situations are deemed to involve interests in possession for Inheritance Tax, in particular a lease for life (IHTA84/S43 (3)) and certain discretionary trusts for disabled people (IHTA84/S89). These are not deemed to be interests in possession for Capital Gains Tax.
Finance Act 2006 introduced radical changes to the treatment of settled property for Inheritance Tax. Only certain kinds of interest in possession are treated as if the settled property belonged to the deceased. Further details may be found in IHTM.
An interest in possession is the right of the beneficiary to enjoy the income from the settled property, see CG36320. For the purposes of the legislation considered in this chapter it includes the right to income during someone else’s lifetime, and an annuity paid out of the settled property. Not all interests in possession are life interests. FA96 amended TCGA92/S72 and TCGA92/S73 so that provisions applying only to life interests in possession now apply to all interests in possession, in the case of deaths on or after 6 April 1996.
Death and trusts: special provisions
TCGA92/S72, TCGA92/S73, TCGA92/S74
There are two main provisions which apply on the death of a person with an interest in possession.
- If the property continues to be settled property, the trustees are treated as disposing of the settled property and reacquiring it at market value on the date of death, but without any charge to tax except for the clawback of held-over gains, see CG36450.
- If someone becomes absolutely entitled to the property, see CG37000, on the occasion of the death of the person with the interest in possession, the trustees are deemed to have disposed of it at market value and reacquired it as bare trustees for the person so entitled. However to the extent that the property concerned is property which was subject to the interest in possession, there is no chargeable gain on that occasion, see CG36450.
With effect from 22 March 2006 these provisions only apply in certain circumstances described in CG36525. Otherwise:
- If the property continues to be settled property there is no effect for Capital Gains Tax.
- If a beneficiary becomes absolutely entitled then there is a deemed disposal at market value under s.71(1) TCGA, see CG37500.
There are however special provisions to cover two specific situations where TCGA92/S72 or TCGA92/S73 apply: