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HMRC internal manual

Inheritance Tax Manual

Lifetime transfers: future payments: calculating the chargeable portion

Where partial consideration is given for a disposition, but the transferor only satisfies their part of the bargain more than a year after the disposition is made - as considered at IHTM14871, you need to calculate the chargeable portion of the payments made. This is done in two stages.

Firstly you measure the element of bounty in the arrangement.

This is the difference between the value of the total payments being made and the value of the property received. This must be valued at the time of the original disposition.

Then you apply this proportion to the payments when they are actually made.

The example below shows how this works in practice.

Example

In 2009 Abdul buys a property from Brian for £200,000.

The property is worth £100,000.

So Abdul is paying partial consideration for the disposition of the property to him by Brian, satisfying the first condition set out at IHTM14871.

Abdul pays £40,000 immediately, with the balance to be paid in five annual instalments of £32,000.

So Adbul is not only paying partial consideration, but he is also satisfying his part of the bargain, paying £200,000, more than one year after the disposition is made. This satisfies the second condition at IHTM14871.

The discounted value in 2009 of the future instalments that Abdul has agreed to pay is say £110,000 but the property is conveyed to Abdul immediately.

Abdul dies in 2013, after paying £40,000 in 2009, and £32,000 in each of 2010, 2011 and 2012, a total of £136,000.

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Loss to Abdul calculated in 2009

Paid immediately

Future payments at 2009 value

Total consideration

Property received

Loss to Abdul £40,000

£110,000

£150,000

£100,000

£50,000  
   

The total value of the payments being made by Abdul is £150,000 (he paid £40,000 immediately and the future instalments of £32,000 per year for five years are valued, in 2009, at £110,000)

Abdul has received property worth £100,000.

The element of bounty is therefore calculated as £150,000 - £100,000 = £50,000.

As the element of bounty is £50,000 and the value of the payments that Abdul agreed to pay, valued in 2009, was £150,000, the chargeable portion of each payment made by Abdul is

50,000 ÷ 150,000 = one third

This proportion is applied to each payment made by Abdul, as follows:

The initial charge on the payment of £40,000 is

One third x £40,000 = £13,333

Similarly, later charges are on

One third x £32,000 = £10,666 for each of the three payments of £32,000 that Abdul made before his death.