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HMRC internal manual

Inheritance Tax Manual

Attribution of values to specific investments: changes in the capitalisation of a company

You will need to reduce the sale value if

  • there is a change in the capitalisation (IHTM34181) of a company to which IHTA84/S183 applies, and
  • the appropriate person (IHTM34161) gave (or became liable to give) consideration for the new holding, IHTA84/S187 (5).

Under S187 (5), the following formula is used to calculate the reduction:

(The value on death of the specific investment sold ÷ the value on death of the whole of the new holding) x the consideration.

The value on death of the specific investment held is found by using the formula (IHTM34183) in IHTA84/S183 (5). 

The value on death of the whole of the holding is found by adding together the value of the original holding and the consideration received.

But in practice, in straightforward cases where there had been only one sale of shares following the reorganisation, the reduction can be calculated as in the example below

Example

At the date of death, Elizabeth owned 7,500 shares in X-ray plc with a date of death value of £15,000.

X-ray plc offered a 1:3 rights issue at £1 each for a total cost of £2,500.

The executor accepted the offer and as a result owned 10,000 shares, the date of death value of the holding was (£15,000 + £2,500) = £17,500.

Within the period of 12 months from the date of death the executor sold 6,000 of the shares for £7,000.

The sale value of the 6,000 shares sold would be reduced by:

6,000 ÷ 10,000 x £2,500 = £1,500

The revised value for the shares sold is (£7,000 – £1,500) = £5,500.