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HMRC internal manual

Inheritance Tax Manual

Interaction with conditional exemption and woodlands relief: conditionally exempt property or woodlands in the estate of the first spouse or civil partner to die

When property is granted conditional exemption (IHTM04111) or woodlands relief (IHTM04121) on the first death, Inheritance Tax is generally due on the sale of the property. 

The charge is levied on the sale proceeds (or value at the time the undertaking is breached), which is added to the value of the estate on death (and any other sales/breaches that have taken place) and tax charged on a top-slice basis. Tax is charged using the nil rate band that applies at the date of sale.

These ‘recapture’ charges are affected by transferable nil rate band and there are different rules about how this will affect the transfer of any unused nil rate band depending upon whether the disposal occurred before (IHTM43045) or after (IHTM43046) the second death.