IHTM09777 - Restrictions on the freedom to dispose of assets: option to purchase is exercised

The example below shows how to calculate the value transferred when an option is taken up.

Example

In 1990, Adam grants Barry an option to purchase Blackacre for £20,000 in 6 years. The gift of the option is valued at £16,000, for which Barry pays £4,000.

When the option is exercised Blackacre is worth £50,000.

The value transferred is calculated as follows:

Open market value = £50,000

Less option price -£20,000

Net value = £30,000

Allow proportionate allowance (IHTM09774) (£4,000 ÷ £16,000) × £30,000 = £7,500

£30,000 - £7,500 = £22,500

Less value chargeable when option granted (IHTM09775) -£12,000

Value transferred = £10,500