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HMRC internal manual

Inheritance Tax Manual

Pre-owned assets: exemptions: relevant property remains part of the Inheritance Tax estate

The charging provisions relating to land (IHTM44003), chattels (IHTM44006) and intangible property (IHTM44009) do not apply to a person at a time when their estate for IHT purposes includes the relevant property, or includes other property which

  • derives its value from the relevant property, and
  • whose value, so far as attributable to the relevant property, is not substantially less than the value of the relevant property, (IHTM44043).

The logic behind this exemption, contained in FA04/Sch15/Para11(1), is that where the person’s estate includes property that is liable to IHT, they should not also pay the POA charge on the same benefit.

Property will be part of the person’s estate where it is included as part of their Free Estate, or where the person has a qualifying interest in possession in the property. This includes an IIP if it arose before 22 March 2006 or one of the favoured trusts, if the interest arose after that date (IHTM16061).

It is only necessary for the property to form part of the person’s estate for IHT purposes; it is not necessary that IHT is actually paid. So although IHT may not actually be payable because the estate is below the nil-rate band, or is subject to spouse or civil partner exemption (IHTM11031); if the property forms part of the estate, the exemption will apply.

Note however that there are two limitations to this ‘ownership exemption’ where

  • although the donor takes a qualifying interest in possession FA04/Sch15/Para 11(11) applies, (IHTM44050), or
  • where the value of the relevant property is reduced by an ‘excluded liability’ under FA04/Sch15/Para11(6), (IHTM44051).

There are some examples of the application of this exemption at IHTM44042.