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HMRC internal manual

Inheritance Tax Manual

HM Revenue & Customs
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Step 3 - interaction: introduction

When the value of an estate is reduced by business relief (IHTM25131) or agricultural relief (IHTM24001), its value for IHT purposes is less than its actual net assets value. In such cases, where the deceased bequeathed specific gifts (IHTM26003), rules known as the interaction rules apply. The example below illustrates the situation.


Barry’s estate consists of:

a farming business £800,000
other non-relievable property £600,000
total value £1,400,000
less relief at 100% on £800,000 -£800,000
IHT value of estate = £600,000

By Will he leaves:

A pecuniary legacy to his spouse of £550,000, with the residue to the children.

How should the chargeable residue be calculated in this example? The actual benefit to the children is £850,000. But if the full amount of the widow’s legacy of £550,000 was deductible from £600,000, the value of the estate for IHT, (the chargeable residue) would be only £50,000, which is well below the tax threshold.

The rules (IHTM26103) of interaction for dealing with this type of situation are contained in IHTA84/S39A.