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HMRC internal manual

Inheritance Tax Manual

Lifetime transfers: specific lifetime reliefs: fall in value relief: form of the relief

The relief works by reducing the value on which tax, or additional tax, on the lifetime transfer is charged on the death. The reduction is the amount by which the transferred asset has diminished in value (but subject to detailed rules regarding amendments to the property).

In the majority of cases, the effect of the relief is simply to reduce the value transferred to the value of the asset at the date of death or sale. Where the loss to the transferor’s estate was greater than the value of the transferred asset, separate rules (IHTM14626) apply.

The reduction in value is solely for the purpose of calculating the tax payable on a failed potentially exempt transfer (IHTM14511) or the additional tax (IHTM14571) payable on the death on an immediately chargeable transfer.

It does not affect

  • the transferor’s cumulative total, which remains at its original figure for the purpose of taxing any later lifetime transfers and the transfer on death, or
  • the tax originally charged at lifetime rates on an immediately chargeable lifetime transfer.

Example

Frances transfers a portfolio of quoted shares to her son David on 1 February 2010 valued at £100,000. On 1 February 2011 she transfers a house to her daughter Jane, valued at £250,000. Frances dies on 1 April 2013, when the Inheritance Tax (IHT) nil-rate band was £325,000.

There is no IHT due on the gift of quoted shares as the value is less than the nil-rate band. IHT of £10,000 is payable on the gift of the house (£250,000 - £225,000 (the remaining nil-rate band after deducting the first gift of £100,000) = £25,000 × 40%).

At the date of death the house was valued at £230,000 and Jane makes a claim for fall in value relief. The IHT payable is reduced by £8,000 (£20,000 × 40%) from £10,000 to £2,000.

However, the original value of the gifts of £350,000 is still used when calculating the tax due on Frances’s estate at the date of death.