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HMRC internal manual

Inheritance Tax Manual

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HM Revenue & Customs
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Step 3 - interaction: anti-avoidance provisions

To restrict the benefit of IHTA84/S39A (2) to straightforward gifts (IHTM26106) under which the beneficiary receives the relievable property, IHTA84/S39A (6) provides that

  • the value of a specific gift (IHTM26011) of relievable property does not include the value of any other gift payable out of that property, and
  • that other gift is not to be treated as a specific gift of relievable property

You should refer any case involving a gift of relievable property where it is unclear whether IHTA84/S39A (6) may apply to Technical. Some examples might be

  • a gift of an option to purchase relievable property
  • a gift of a share of the relievable property by reference to cash value (such as ‘a share of my business to the value of £50,000 to Laura’)
  • any case where it is not clear whether the other gift is payable out of the relievable property, or
  • any case where from the terms of the gift it seems that the beneficiary is likely to receive cash rather than the relievable property itself

Where a gift that appears doubtful is made by an instrument of variation (IOV) (IHTM35011), the IOV should not be accepted as being within IHTA84/S142 without the approval of Technical.

An example of how the restriction under IHTA84/S39A (6) operates is shown below

Example

Anne died in October 2000

Her estate of £1.5m comprises

  • a farm valued at £1m
  • non-relievable assets valued at £500,000

Her estate passes by Will:

  • The farming business to her son subject to payment out of it of £300,000 to her husband.
  • The residue to her daughter.

Stage 1

Value transferred after business relief (BR) and agricultural relief(AR) at 100% is £500,000.

Stage 2

The specific gift of the farm to the son is reduced by the amount payable out of it (£300,000). So it becomes a specific gift of relievable property to the extent of £700,000 only and is reduced by BR and AR to nil

Stage 3

The £300,000 which the son has to pay to the widow is not treated as a specific gift of relievable property. So it needs to be reduced by the appropriate fraction (IHTM26108)

£500,000 (A) ÷ £800,000 (B) × £300,000 = £187,000

A = the reduced value of the estate (£500,000) less the reduced value of the specific gift to the son (nil)

B = the unreduced value of the estate (£1.5M) less the unreduced value of the specific gift (£700,000))

Stage 4

There is no value to gross up.

Stage 5

Calculate the residue using the reduced values

value transferred £500,000
   
total of the specific gifts £187,500
residue £312,500

Stage 6

The total chargeable is £312,500 - value transferred of £500,000 less the reduced value of the exempt legacy (£187,500).