SVM111260 - IHT Business Property Relief: Relief on lifetime transfers - (additional) tax payable on transferor’s death within seven years

Introduction

Sections 113A and 113B IHTA 1984 contain additional conditions for lifetime transfers made within seven years of the death of the transferor. Except as stated in the next paragraph, the conditions apply to determine whether business relief (BR) is available when calculating

a. the value transferred by a failed Potentially Exempt Transfer (PET) section 113A(1) IHTA 1984

and

b. for all other lifetime chargeable transfers, the additional tax payable because of the transferor’s death. section 113A(2) IHTA 1984

It is an essential pre-condition that:

where the transfer is a failed PET, the property was “relevant business property” at the time the transfer was made - in other words, the conditions for relief given earlier in this chapter were then satisfied

or

where the transfer was chargeable when made, it qualified for relief at that time.

The Additional Conditions for deaths on or after 6 April 1996

Where a PET of unquoted shares or securities becomes chargeable or additional tax becomes payable on a chargeable lifetime transfer of unquoted shares or securities as a result of a death on or after 6 April 1996, the only additional requirements provided by sections 113A(3)(a) IHTA 1984 and 113A (3A)(b) IHTA 1984 are that the transferee must have retained the gifted shares or securities until the transferor’s death (or their own death, if earlier) and that they remained unquoted throughout the period from the gift to the death. This relaxation of the original rules was effected by section 184 Finance Act 1996, which amended section 113(3A)(b) IHTA 1984 so that it applied to all unquoted shares in a company.

Example

In 2026, a father gives his son a 10% holding in an unquoted company. The father dies in 2029, at which time the shares are still held by the son and remain unquoted. 100% BR is available on the gifted shares together with any other qualifying assets up to the allowance of £2.5 million. Any value attributable to qualifying assets exceeding the allowance will be eligible for relief at a rate of 50%. The failed PET qualifies for relief regardless of whether the conditions for BR would be satisfied had the transfer taken place in 2029. Only the shares becoming quoted on a recognised stock exchange would preclude relief.

Where the death occurred before 6 April 1996, there was an additional test for most unquoted shares or securities - that they would still have been relevant business property if the transferee had made a gift of them at the date of death.

Retention by the transferee

Section 113A(3)(a) IHTA 1984

The requirement in section 113A(3) IHTA 1984 is that “the transferee” owned “the original property” throughout the period from the date of transfer to the death of the transferor (or, under section 113A(4) IHTA 1984, the earlier death of the transferee). This requirement is relaxed if the original property has been replaced, subject to certain strict conditions, detailed in this chapter at SVM111280.

“The transferee”

“The transferee” is defined (by section 113A(8) IHTA 1984 for the purposes of section 113A IHTA 1984 as a whole) as the person who became the owner of the property on the transfer or, where on the transfer the property became (or remained) settled on discretionary trusts or other relevant property trusts subject to exit and ten-yearly charges, the trustees of the settlement. Except for discretionary trusts and other relevant property trusts subject to exit and ten-yearly charges, ownership means “beneficial ownership”, so a life tenant can be a transferee for this purpose, especially for pre-22 March 2006 gifts into trust.

 

Additional Guidance: SVM150000