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HMRC internal manual

Capital Gains Manual

Capital Gains Tax: termination of charitable exemption

A trust may be established in which the income is applied for charitable purposes for a limited period with the capital then reverting to the settlor’s family possibly after a period in which the income is also applied for non-charitable purposes. TCGA92/S256(2) deals with this by treating the trustees as though they had sold, and immediately reacquired, the chargeable assets at their market value when the trust property ceases to be held for charitable purposes.

For example, Mr A may settle a trust in which the income is to be applied for charitable purposes for 10 years, with the income then being paid to Mr A’s wife for her life if she is still alive and then to his children absolutely. When Mrs A dies the trust terminates and the trust property is divided amongst the children or their estates if they predecease Mrs A. The trustees would be treated as if they had sold and immediately reacquired the trust assets at their market value at the 10 year point.

Any gains which arise on the deemed disposal(s) are assessed together with any gains from previous disposals, the proceeds of which had been used to acquire the current chargeable assets.

Although TCGA92/S256 (2) is primarily intended to prevent the exploitation of the normal charitable exemption the rules apply in all cases where:

  • a trust ceases to be a charitable trust


  • does not dispose of its chargeable assets charitably.

This may happen as a result of a change in the legislation or public policy. For example in 1993 the Charity Commissioners deregistered gun and rifle clubs as no longer being established for charitable purposes.

Nearly all cases caught by TCGA92/S256(2) are dealt with by HMRC Charities because they deal with all charities but local offices may deal with cases to which CG67516 applies. CG67516 deals with certain cases where assets used for the purposes of a school, place of worship, or museum cease to be used for that purpose.