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HMRC internal manual

Capital Gains Manual

Gifts: Inheritance Tax: gifts immediately chargeable to Inheritance Tax

TCGA92/S260 (2) (a)

The most common examples of gifts which qualify for relief because there is an immediate charge to Inheritance Tax are:

  • life-time gifts to a settlement;
  • the deemed disposal by the trustees under TCGA92/S71 when a beneficiary becomes absolutely entitled to some or all of the chargeable assets in the trust. See CG37000+;
  • a transfer of chargeable assets to a beneficiary by trustees exercising powers of appointment or advancement.

For gifts to settlements made before 22 March 2006 the relief would usually be given on gifts to discretionary settlements. This is because gifts to a settlement in which the beneficiary had an interest in possession, see CG36320, were not chargeable transfers for Inheritance Tax. The changes to Inheritance Tax made by Finance Act 2006 mean that most gifts to settlements made on or after 22 March 2006 will be chargeable transfers. This change has considerably increased the number of cases which qualify for relief under section 260. See CG36540+ for a description of the Inheritance Tax changes and their impact on claims to relief under section 260.

There is no requirement for any Inheritance Tax to be paid for the relief to be given. Relief is available if the value of the chargeable transfer is within the Inheritance Tax nil rate band. The relief also applies where the value of the chargeable transfer is nil because of Inheritance Tax business or agricultural property relief.

TCGA92/S260 (2)(a) specifically allows relief for cases in which a disposal is exempt from Inheritance Tax because it is within the annual exemption for that tax. This rule is relevant for transfers like that in IRC v Melville 74 TC 372 in which there is a significant capital gain but the value of the transfer for Inheritance Tax purposes is very low. For example, assume the Inheritance Tax annual exemption is £3000, the nil-rate band £325,000 and the value of the asset disposed of is £300,000. Relief can be claimed on the full amount of the gain.

A specific exemption from Inheritance Tax may mean relief under section 260 cannot be claimed. Examples include:

  • Disposals of property within three months of the settlement being created or the ten year anniversary charge, section 65(4) Inheritance Act 1984
  • Distributions within two years of the creation of a discretionary trust set-up by will.

Relief is not due if the disposal is a potentially exempt transfer for Inheritance Tax purposes. See CG67042.