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HMRC internal manual

Inheritance Tax Manual

Lifetime transfers - additional conditions: Replacement property

IHTA84/S113B relaxes the conditions in IHTA84/S113A and will apply in the situation where the transferee (IHTM25367) has sold all or part of the original property prior to the death of the transferor and invested the whole of the proceeds in the purchase of other qualifying assets – ‘the replacement property’. Different parts of the asset can be replaced at different times.

The conditions for IHTA84/S113B 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 three years (or such longer period as the Board may allow) after the disposal of the original property. Prior to 30 November 1993 the period in which replacement property could be acquired was 12 months only with no discretion for extension, IHTA84/S113B (2) (a) as amended by FA94/S247(1) .
  • the disposal and acquisition must both be made in transactions at arm’s length or arm’s length terms, IHTA84/S113B(2)(b). This can include an exchange of one property for another.

Where the above conditions are met the conditions in IHTA84/S113A(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 immediately before the death of the transferor (or the transferee’s own earlier death), IHTA84/S113B (3) (a)
  • throughout the period beginning with the date of the chargeable transfer and ending with the death (disregarding any period between the disposal and acquisition) either the original property or the replacement property was owned by the transferee, IHTA84/S113B(3)(b)
  • The replacement property has to qualify as relevant business property immediately before the transferor’s death (or the transferee’s death if it was earlier), IHTA84/S113B(3)(c).

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/S113B(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 at the date the lifetime transfer was made.

IHTA84/S113B (1) (b) refers to the ‘whole of the consideration’. This is taken to mean the sale proceeds net of any professional costs and any CGT. A strict reading of the legislation suggests that the relief is completely lost if anything less than the whole of the consideration is applied towards the purchase of replacement property. You should refer any case where this is disputed to Technical.

You should also refer to Technical any case where the taxpayer claims that the relief should apply where there is a longer period than the three years ‘allowed period’ between the original disposal and the purchase of replacement property.