CG36510 - Death of person with interest in possession: recovery of held-over gain

TCGA92/S67 (4), TCGA92/S74

Where an interest in possession in settled property is terminated by the death of the beneficiary (or the person entitled to such an interest dies although the interest does not then terminate) and the disposal of the assets comprising that settled property to the trustees had been the subject of a claim to gifts hold-over relief (see CG66880P for business assets and CG67030P for gifts subject to Inheritance Tax), then the exemption from charge on the trustees under Sections 72(1)(b) or 73(1)(a) is withdrawn, but only to the extent of the held-over gain (or a part of it corresponding to the assets deemed to be disposed of on the death of the beneficiary).

Where a person with an interest in possession dies, and section 72 or section 73 applies, a check should be made to discover whether any of the relevant assets were the subject of an earlier gifts hold-over claim.

Example 1

In 1999, a settlor settled assets having a market value of £100,000, on trustees. A claim was made by the settlor under TCGA92/s165. The held-over gain was £30,000, so the trustees were treated as acquiring the assets for £70,000. All the assets were subject to a life interest. The life tenant died in 2016 when the market value of the assets was £150,000. The assets remained settled property and Section 72(1) applied. The trustees are deemed to dispose of and re-acquire the assets at £150,000, but the chargeable gain on the trustees, which would otherwise be £80,000, less indexation, is limited to the held-over gain of £30,000.

Example 2

In 2002, a settlor settled on trustees land having a market value of £100,000. A claim was made by the settlor under section 165 of TCGA, and the held-over gain was £30,000, so that the trustees are treated as acquiring the land for £70,000. The land was subject to a life interest in one quarter of the income. The life tenant died in 2017 when the value of the land was £150,000. The land ceased to be settled property on the death and the trustees are deemed to dispose of the land for £150,000. The chargeable gain of say £50,000 would be reduced under TCGA92/S73 (2) by one quarter to £37,500, but that reduction is diminished by one quarter of the held-over gain, £7,500, so that the amount assessable is £45,000.