Section 260 of the Taxation of Chargeable Gains Act 1992 lets the capital gain on almost any asset be held over when the transfer is a chargeable transfer for inheritance tax, such as a gift into a discretionary trust or an asset leaving a relevant property trust to a beneficiary. The asset does not need to be a business asset, and the relief is available even when no inheritance tax is payable because the value is within the nil rate band. It is blocked for settlor interested trusts, for exits that are not inheritance tax occasions and, in most cases, for transfers to non residents.

When does section 260 apply?

Section 260(2)(a) covers a disposal made otherwise than at arm’s length that is a chargeable transfer for inheritance tax, or would be but for the annual exemption in section 19 of the Inheritance Tax Act 1984, and is not a potentially exempt transfer. HMRC helpsheet HS295 gives the two main examples:

  • an individual gives an asset to the trustees of a trust, other than a disabled trust; and
  • a person becomes entitled to property from a relevant property trust.

Section 260(2) also covers a short list of occasions that are exempt from inheritance tax, including a beneficiary becoming entitled under a pre 2006 accumulation and maintenance trust, a bereaved minors trust or an 18 to 25 trust, and certain heritage transfers.

The type of asset is irrelevant. Let property, quoted shares and investment portfolios all qualify, which is what sets section 260 apart from business asset gift holdover relief under section 165. CG67030 adds that where section 260 is available it takes priority, and section 165 cannot apply.

Does it matter that no inheritance tax is payable?

No. CG67033 and HS295 both confirm that relief is available where the transfer is chargeable but no tax is due, for example because it falls within the nil rate band or the annual exemption. The GOV.UK inheritance tax guidance gives the threshold as £325,000. So a gift into a discretionary trust within the settlor’s available nil rate band can carry a large gain with it and no immediate tax at all. See chargeable lifetime transfers for how the inheritance tax side is calculated.

How does the relief work on a gift into trust?

Under section 260(3), the donor’s chargeable gain and the trustees’ acquisition cost are both reduced by the held over gain. The trustees inherit the donor’s base cost, and the gain is taxed when they sell. Where the trustees are the transferee, section 260(1)(c) requires the claim to be made by the transferor alone.

HMRC’s example at CG67034: Dan gives quoted shares worth £500,000, which cost him £300,000, to a discretionary settlement. Without relief he would have a gain of £200,000. With a claim, he has no gain and the trustees’ base cost is £300,000.

If the trustees pay something, section 260(5) restricts the relief by any excess of the payment over the donor’s allowable costs. In the same example, if the trustees had paid £400,000, Dan would be taxed on £100,000 and only £100,000 would be held over.

Can gains be held over when assets leave the trust?

Yes, where the exit is a chargeable occasion. When a beneficiary becomes absolutely entitled to trust property, the trustees are treated as disposing of it at market value. If that is an exit from a relevant property trust, it is a chargeable transfer and the trustees’ gain can be held over into the beneficiary’s base cost. Because the transferee is an individual, the claim must be made jointly by the trustees and the beneficiary. Section 260(9) disapplies the excess consideration restriction for these deemed disposals.

Holdover is not available where the exit is not an inheritance tax occasion. HS295 lists distributions within two years of death from a discretionary will trust, distributions within three months of the start of the trust, and transfers within three months of a ten year charge. IHTM42117 explains that section 65(4) of the Inheritance Tax Act 1984 prevents an exit charge in the first quarter after the trust starts or after a ten year anniversary, so there is no chargeable occasion to support the claim. The ten year charge itself is not a disposal for capital gains tax. See trust exit charges.

When is the relief blocked?

  • Settlor interested trusts. Under section 169B, relief on a gift to trustees is denied if the settlor, their spouse or civil partner, or their dependent child, including a stepchild, can benefit, or if arrangements exist under which the settlor could acquire an interest. HS295 notes exceptions for disabled trusts and heritage maintenance funds. See settlor interested trusts.
  • Later clawback. If the trust becomes settlor interested within the clawback period, the relief is withdrawn. HS295 says that period ends immediately before the sixth anniversary of the start of the tax year following the one in which the transfer was made.
  • Non resident transferees. CG67032 explains that section 261 denies relief where the individual or trustees receiving the asset are not UK resident, or are treated as non resident under a double tax treaty. Section 261ZA makes an exception for interests in UK real property.
  • Emigration. HS295 says that if an individual transferee becomes non resident within six years of the end of the tax year of the gift, still holding the asset, the held over gain comes back into charge.

What about homes and the inheritance tax credit?

Section 226A is the trap for residential property. If the base cost of a dwelling has been reduced by a section 260 claim, private residence relief is not available on its later disposal, even if a beneficiary lived in it. A family home taken out of a discretionary trust with a holdover claim may therefore be fully taxable when sold. See private residence relief.

In the other direction, section 260(7) allows any inheritance tax attributable to the asset on a chargeable transfer to be deducted in computing the transferee’s later gain, limited to the amount of that gain.

A worked example

Illustration only. On 1 November 2026 Helen gives a let house worth £300,000, which cost her £180,000, to a discretionary trust for her adult children. She has made no other chargeable transfers in the previous seven years, so the gift is within her nil rate band and no inheritance tax is payable. She claims section 260 relief, so her £120,000 gain is held over and the trustees’ base cost is £180,000.

In 2030 the trustees appoint the house outright to her son Sam when it is worth £340,000. This is an exit from a relevant property trust outside the first quarter after the trust began. The trustees’ gain of £160,000 can be held over by a joint claim, giving Sam a base cost of £180,000. If Sam moves in and later sells, section 226A means he cannot claim private residence relief. Had the trustees paid tax instead, at the trustee rate of 24%, Sam’s base cost would be £340,000 and relief would be available for his period of occupation.

How do you claim?

Use the claim form in HS295, one form per disposal, attached as a scanned PDF to an online return if you file one. CG66889 sets the time limit at four years from the end of the tax year of the gift. HMRC will not accept a claim that restricts the held over amount to a chosen figure, for example to use the donor’s annual exempt amount. Under Statement of Practice SP8/92, described in HS295, the parties can defer agreeing valuations; for a gift into trust the trustees must join in that request even though the claim is the settlor’s alone. For the trustees’ own position see trustees and capital gains tax.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

Related Accountapedia entries

Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.