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HMRC internal manual

Inheritance Tax Manual

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HM Revenue & Customs
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Lifetime transfers: Replacement property (other than shares or securities)

IHTA84/S124B relaxes the conditions in IHTA84/S124A and will apply in the situation where the transferee (IHTM24179) has sold all or part of the original property (IHTM24174) before the death of the transferor and reinvested the whole of the proceeds in the purchase of other qualifying agricultural property - ‘the replacement property’. This does not include shares in agricultural companies within IHTA84/S122. Different parts of the property can be replaced at different times but there cannot be replacement from any replacement property to further property.

The conditions for IHTA84/S124B to apply are that

  • for deaths and other events occurring on or after 30 November 1993, the replacement property must be acquired, or a binding contract for its acquisition entered into within the ‘allowed period’. This is 3 years (or such longer period as the Board may allow) after the disposal of the original property. Before 30 November 1993 the period in which replacement property could be acquired was 12 months only with no discretion for extension, IHTA84/S124B (2)(a) as amended by FA94/S247 (2).
  • the disposal and acquisition must both be made in transactions at arm’s length or arm’s length terms, IHTA84/S124B (2)(b). This can include an exchange of one property for another.

Where the above requirements are met the conditions (IHTM24173) in IHTA84/S124A (3) are taken to be satisfied in relation to the original property so long as the further following conditions are also met in relation to the replacement property

  • the replacement property is owned by the transferee (IHTM24179) immediately before the death of the transferor (or the transferee’s own earlier death) and is not then subject to a binding contract for sale, IHTA84/S124B (3)(a)
  • the original property (IHTM24174) was owned by the transferee and occupied (by the transferee or another) for agricultural purposes (IHTM24060) throughout the period beginning with the date of the chargeable transfer and ending with the disposal, IHTA84/S124B (3)(b)
  • throughout the period beginning with the date of acquisition of the replacement property and ending with the death, the replacement property was owned by the transferee and occupied (by the transferee or another) for agricultural purposes, IHTA84/S124B (3)(c), and
  • the replacement property is agricultural property (IHTM24030) immediately before the death of the transferor (or the transferee, if earlier), IHTA84/S124B (3)(d).

It may be that the transferor has died after disposal of the original property by the transferee but before any acquisition of replacement property. The relief will still apply if the replacement property is acquired or a binding contract for its acquisition entered into within the ‘allowed period’ referred to above, IHTA84/S124B (5). Note that this subsection only applies where the transferor has died before the transferee.

The date of any disposal or acquisition for these purposes is the date of the contract.

Relief is available at the rate applicable (IHTM24140) at the date the lifetime transfer was made.

If agricultural relief is not due because the replacement property consists of non-agricultural business assets, business relief may be available instead if the original property qualified as relevant business property (IHTM25141).

IHTA84/S124B (1)(b) refers to the ‘whole of the consideration’. This is taken to mean the sale proceeds net of professional costs and any Capital Gains Tax. A strict reading of the legislation suggests that the relief is completely lost if anything less than the whole of the consideration were applied towards the purchase of replacement property. You should seek advice on any case where this is disputed.

You should also seek advice on any case where the taxpayer claims that the relief should apply where there is a longer period than the 3 years ‘allowed period’ between the original disposal and the purchase of replacement property.