IHTM42163 - Relevant property: CGT and IT
deductions
- Any CGT incurred and payable prior to the
ten yearly anniversary (TYA) is deductible from the TYA value (in
the normal way).
- This evidence of actual payment is
important in CGT cases, because there will often be occasions where
the CGT liability has been quantified and agreed, but the taxpayer
elects for holdover relief under TCGA92/S165 or S260. In such a
case the CGT is not in fact paid and deduction against the
inheritance tax value is not due.
A claim is sometimes made at the TYA that the trustees can never
obtain the full open market value of the settled fund because, in
realising the assets, CGT will certainly be payable. It is argued
that the value of the fund should be discounted to reflect this
‘inherent’ tax liability.
- Do not allow a deduction. The claim to IHT
arises upon ‘the property comprised in a settlement’.
It does not arise on the fund as such. Accordingly, the settled
fund as an entity is not the thing being valued. The
‘property’ means the underlying assets and each of
these is incapable of owing tax.
This depends on who pays the tax. You can allow a deduction only
where the value in the hands of the recipient will be reduced
because of the CGT payable by that recipient.
IHTA84/S165 (2) specifically covers the case where a
chargeable transfer (incurring a proportionate charge for
inheritance tax) includes a disposal for CGT.
- Deduction of the CGT is not allowed on the
lifetime transfers basis provided by IHTA84/S165 (1), but
- if the trustees of a discretionary
settlement incur a liability for CGT on the proportionate charge
and it is borne by a person who becomes absolutely entitled to the
settled property concerned, the amount of the CGT paid is
deductible.
- If the trustees bear the CGT out of
remaining settled funds then the CGT payable is not deductible
against the taxable property.
Where the whole fund is the subject of the
transfer/proportionate charge then it will not be possible for the
trustees to pay CGT from retained funds, and the property in the
hands of the recipient will inevitably be reduced by the CGT, so
you can accept the deduction.
Transfers to other settlements
- The person becoming absolutely entitled
need not take beneficially – the transfer could be to the
trustees of another settlement – see Hoare Trustees v Gardner
[1978] 1 AER 791.
- In the case of a transfer to another
settlement IHTA84/S81 may well apply, but provided that the
transfer is a chargeable transfer for inheritance tax purposes the
CGT deduction is not affected by S81, which is purely an
inheritance tax provision.
- It follows that where the transfer is from
one discretionary settlement to another discretionary settlement
there is no chargeable transfer against which a deduction can be
taken.
- These rules apply equally to interests in
possession.
The rule of general law is that income debts should be paid out
of income. But it is more fitted to interest in possession trusts,
where the decided cases seek to hold a balance between life tenants
and those entitled in remainder - Carver v Duncan [1985] STC 356.
The settlor may authorise the payment of capital debts out of
income, or income debts out of capital, but cannot change the
nature of the source used.
The value of the rule is debatable in trusts where there is
no income on hand from which the income tax can be paid. Where a
worthwhile amount of inheritance tax is at stake you should
consider the deduction.
- It may be that some income has been
included among the relevant property (the deduction would be right,
but the inclusion wrong)
- It may be that there is income on hand
which the taxpayer has quite properly left out of the form of
account.
- If there is no income available, ask the
taxpayer for details of the income that arose and what became of
it. The facts can then be considered.
1. Capital Gains Tax and holdover
relief
