TCGA 1992 s.274 (market value uplift) and "failed PET"

I note that s.274 provides for the value of an asset “forming part of [the] estate” on death to be rebased to the market value as at the date of death.

I also note that the market value of a failed PET, as at the date of the transfer to the donee, must be included within the calculation of the net estate (and must “use up” the first part of the Nil Rate Band).

My question is - would the failed PET asset (lets say, a House) be deemed as “forming part of the estate” for CGT purposes? On the one hand, it was incorporated in the IHT calculation and substantially increases the IHT liability, but on the other hand, it was not legally owned by the Deceased and so, under any normal interpretation of “forming part of that estate”, wouldn’t be included.

If not, it seems to me that there is a double taxation issue; (1) IHT is substantially increased because the Nil Rate Band is used up, without the ability to enjoy taper relief; and (2) the Donee of the failed PET is liable to pay CGT on any subsequent disposition - and must use the base value as at the date of the gift and cannot enjoy the market value uplift under s.274.

Is my understanding correct? Are there any workarounds to this?

Thanks all,
Matthew Dickerson

A failed PET does not form part of the deceased’s estate for IHT [IHTA 1984 s 5(1)].

Whilst the failed PET becomes chargeable to IHT on the donor’s death (using up some or all of the NRB) there is no revaluation of the original gift for CGT. TCGA 1992 s274 merely provides for assets which form part of the deceased’s estate whose values have been ascertained for those values to be the acquisition cost of the PRs for CGT at market values.

Revaluation on death to market value is a separate matter and provided for by TCGA 1992 s62(1) and relates to assets of the deceased which he/she was competent to dispose (which would exclude the failed PET).

Malcolm Finney