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HMRC internal manual

Inheritance Tax Manual

Replacement property: Example of limiting the relief


A owns and farms Orchard Farm and has done so for a number of years.

In October 1988, A sells Blackacre for £600,000 and buys Manor Farm for £800,000 to increase the scope of his farming operations. Both transactions are at arm’s length. Both prices are wholly attributable to agricultural value.

In April 1990, A dies. Manor Farm then has an agricultural value of £1,000,000. The two year occupation condition in IHTA84/S118 (1) is satisfied.

A practical way to give effect to IHTA84/S118 (3) in such circumstances is to adopt the following apportionment:

  • The agricultural value of Orchard Farm at time of sale (on the facts, the sale price), divided by
  • the agricultural value of Manor Farm at the time of the purchase (on the facts, the purchase price), multiplied by
  • the agricultural value of Manor Farm at date of death or in figures

Or (£600,000 ÷ £800,000) × £1,000,000 = £750,000

The result of this approach is that on A’s death the agricultural relief on Manor Farm is limited to £750,000. The excess of £250,000 does not qualify for relief. You should ignore the costs of sale and of purchase.

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)