Inheritance Tax Act 1984 section 165

Tax on capital gains

Section 165 deals with the interaction between inheritance tax and capital gains tax when a chargeable transfer involves the disposal of an asset that gives rise to a capital gain, and provides relief where the recipient bears the capital gains tax liability.

• Where a chargeable transfer triggers a capital gain and the recipient (donee) bears the resulting capital gains tax or income tax, the tax borne by the donee reduces the value transferred for inheritance tax purposes.
• A different rule applies for settled property: if the gain accrues to trustees, the general relief does not apply, but if a person who becomes absolutely entitled to the settled property bears the capital gains tax, that tax similarly reduces the value transferred.
• Where capital gains tax has been postponed under Schedule 14 to the Finance Act 1984 and later becomes payable because a close relative of the beneficiary receives a capital payment, any tax paid by that close relative is treated as satisfying a liability of the close relative for inheritance tax purposes.
• The overall effect is to prevent double taxation by ensuring that capital gains tax borne by the recipient is taken into account when calculating the inheritance tax charge on the transfer.