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HMRC internal manual

Inheritance Tax Manual

Lifetime transfers: omissions: omission to exercise a right

IHTA84/S3(3) provides that, subject to certain requirements discussed below, the omission to exercise a right may be treated as a disposition and as such will be a transfer of value and, if not within any exemption, a chargeable transfer.


Andy owns property but, some years ago, Boris secured the right to acquire it at a price below its current market value. The right had to be exercised before 1 January 2001 which Boris deliberately fails to do and in effect decreases his estate but increases Andy’s. Subject to exemptions, the gift is taxable.

The right

The requirement is that there shall be a ‘right’ which a person (the transferor) is in a position to exercise.

  • The right may either be one connected with property or be purely contractual.
  • This does not include rights that are primarily of a personal or non-pecuniary nature, the non-exercise of which do not diminish the value of the right-holder’s estate such as deliberately failing to vote at a company meeting on a topic not clearly resulting in a decrease in value of the person’s shares.

The result of failing to exercise the right must be to increase the value of:

  • another person’s estate, or
  • where the omission occurred on or after 11 April 1978, settled property in which no interest in possession exists.

If it is established that there was a right, and that the transferor by deliberately failing to exercise that right has diminished the value of their estate and increased that of another person (or settled property in which no interest in possession subsists) they are treated as having made a transfer of value (IHTA84/S3 (1)).

If the right subsisted for a period, the disposition is regarded as made at the last opportunity of exercising the right. The timing may be important in respect of valuation dates and the date for interest.

A further overriding condition is that the failure to exercise the right must be deliberate.

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Interaction with other statutory provisions

In considering IHTA84/S3 (3), bear in mind the possible effects of IHTA84/S10 (1). This would cover such events as failure to take up a rights issue solely because of a shortage of ready cash, or failure to litigate a claim against a stranger purely to avoid the uncertainty and costs involved in a law suit.

Although S3(3) deems a disposition to have been made, it is then covered directly by S3(1) without the aid of S3(4). The exemptions in IHTA84/S19 to 22 therefore apply to the deemed disposition and are not excluded by IHTA84/S19(5), IHTA84/S20(3), IHTA84/S21(5) and IHTA84/S22(6).