A residential property worth £350k was gifted inter vivos. The donor died six months later and the PET became wholly chargeable to IHT (because prior lifetime transfers had wholly used donor’s NRB) - £140k in IHT paid by donee. Donee has now sold the property for £800k. Is the donee’s base cost £350k or £490k? Tax paid on immediately chargeable lifetime transfers is allowed under TCGA92 s.38 and TCGA92 s.274 does not appear to apply to failed PETs, so the IHT on the failed PET would appear to be allowable.
Does the situation change (is s.274 brought into play) if the initial gift was a Gift-with-Reservation-Of-Benefit?
TCGA 1992 s 274 relates only to assets forming part of the deceased’s estate immediately before death and simply provides for an ascertained value of an asset for IHT to supercede market value of the asset for CGT. The section has no relevance for PETs or gifts with reservation.
A donee’s base cost of an asset (a PET) is not inflated by any IHT which may arise on the donee’s subsequent death. If, however, hold-over relief under TCGA 1992 s165 applies any IHT on a PET which becomes chargeable is deductible in computing any gain as and when the donee disposes of the asset [TCGA 1992 s 165(1)]. Similarly, where TCGA 1992 s 260 applies [TCGA 1992 s 260(7)].
Otherwise there is no deduction for CGT for IHT payable on a lifetime chargeable transfer on a subsequent disposal by the donee. TCGA 1992 s 38 is exhaustive.