577 Termination of life interest on death of person entitled

Summary

This section modifies the application of section 576(1) where the occasion on which a person becomes absolutely entitled to property as against a trustee is the termination of a life interest by the death of the person entitled to that interest. In any such case the deemed disposal by the trustees of the assets forming part of the settled property does not give rise to any chargeable gain or allowable loss and the deemed reacquisition by the trustees of that property is deemed to be at the market value of the assets at the date of death.

Where there is a termination of a life interest in possession in settled property in circumstances that the property remains settled property, the property is deemed to be disposed of and reacquired by the trustee at market value, thus resulting in a charge to capital gains tax. Such a charge does not arise in respect of heritage assets exempted from inheritance tax under section 77 of the Capital Acquisitions Tax Consolidation Act 2003. However, if the exemption from inheritance tax ceases to apply in a year of assessment, the capital gains tax liability which but for that exemption would have arisen is deemed to arise in that year of assessment.

Details

Definition

(1) The definition of “life interest” in relation to a settlement is set out. The definition specifically excludes discretionary interests and certain annuities. A life interest is to include an entitlement to an annuity payable out of a specific fund with no recourse to any other property of the settlement. The specific fund out of which the annuity is payable is in these circumstances to be treated as if it were a separate settlement.

Termination of life interest

(2) Under section 576(1) when a person becomes absolutely entitled to any settled property as against the trustee, all the assets forming part of the settled property to which the person becomes so entitled are deemed to have been disposed of and immediately reacquired by the trustee at their market value, thus giving rise to a chargeable gain or an allowable loss. However, this rule is modified where any such occasion is the termination of a life interest by the death of the person entitled to that interest. In those circumstances no chargeable gain or allowable loss arises on the deemed disposal and the deemed reacquisition is treated as made at the market value of the assets at the date of death.

(3) Where a life interest in possession in all or part of settled property terminates, the whole or the part of the settled property which at the time remains settled property is treated as being disposed of and immediately acquired by the trustee for a consideration equal to the market value of the whole or part of the property. This, of course, may give rise to a chargeable gain or an allowable loss in the hands of the trustee.

For the purposes of subsection (3) —

• (4)(a) where a life interest is a right to income of the trust, it is to be treated as a life interest in the corresponding property, and
• (4)(b) where there is a life interest in part of the property and the life interest is a life interest in income with no recourse to the remainder of the property, the part of the property in which the life interest subsists is to be treated as if it were a separate settlement. [This treatment is similar to that under the definition of “life interest” in subsection (1) where an annuity payable out of a specific fund with no recourse to any other property of the settlement is treated as a separate settlement. Any case where the provisions of subsection (1) and this subsection apply to the same assets should be submitted to the Revenue Commissioners for instructions.]

(5)(a) Where subsection (3) applies on the termination of a life interest in settled property caused by the death of the person entitled to that interest and the property in question remains settled property, the property is deemed to have been disposed of by the trustee and as a result a charge to capital gains tax may arise on the trustee of the settlement. However, if any asset forming the whole or part of the settled property is comprised in an inheritance taken on death and is exempt from inheritance tax under section 55 of the Capital Acquisitions Tax Act, 1976 or that section as applied by section 39 of the Finance Act, 1978, then, that asset is not to be treated as having been disposed of by the trustee.

(5)(b) Where in any year of assessment the exemption from inheritance tax in respect of an asset ceases to apply, any capital gains tax liability which would have arisen under subsection (3) but for that exemption will be deemed to arise in that year of assessment.

Relevant Date: Finance Act 2021