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HMRC internal manual

Inheritance Tax Manual

From
HM Revenue & Customs
Updated
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Pre-owned assets: calculation of the charge on chattels: where the chargeable person disposed of other property

Where the disposal condition (IHTM44007) is met because the chargeable person disposed of other property and the proceeds of this disposal were used to acquire the chattel, the appropriate amount is found by reference to the proportion of the value of the chattel property that can be reasonably attributed to the property originally disposed. How should this proportion be calculated?

Each case will turn on its own facts and the

  • value of the other property disposed of,
  • its ultimate sale price,
  • the consideration provided, and
  • the independent financial resources of the recipient

will all have to be taken into account when making a judgement as to the value reasonably attributable.

Example

Rupert gives a painting worth £100,000 to his daughter Audrey. Audrey later sells the painting for £300,000 and purchases a sculpture which she allows Rupert to stand in his garden. Plainly, the value of the sculpture is wholly attributable to the proceeds of the painting that Rupert disposed of, so it is reasonable to treat the value of the sculpture as wholly attributable to the property originally disposed of. The open market value of the sculpture multiplied by the official rate would be subject to the POA charge.

If the purchase price of the sculpture had been £400,000, the proportion of the value reasonably attributable to the original property will be 75%. The value that can be reasonably attributed to the new property cannot exceed the final value of the property originally disposed of.

If the value of the sculpture at the valuation date was £500,000 the part of the appropriate amount that can be reasonably attributed to the original property is not limited to the £300,000 originally put into the purchase of the sculpture, but is 75% of the value of the sculpture at the relevant valuation date (75% of £500,000 is £375,000).

So if the official rate is 5%, the full appropriate amount is £25,000 and of that, the part that can be reasonably attributed to the original property under FA04/Sch15/Para 6(2)(b), is not

25,000 × (300,000 ÷ 500,000) = £15,000, but is instead

25,000 × (375,000 ÷ 500,000) = £18,750.

If, in the above example, Audrey had used the sale proceeds to buy some antiques for her own use, but also used her own resources to buy a painting which hung in Rupert’s home, you should not treat the value of the painting as attributable to the property originally disposed of by Rupert.