IHTM26110 | Step 3 - interaction: the appropriate fraction where there are specific gifts or relievable property

If there are specific gifts (IHTM26011) of relievable property, the appropriate fraction (IHTM26108) has to be adjusted to exclude them and becomes:

• The value of the free estate after business relief (BR)/agricultural relief(AR) less specific gifts of relievable property at reduced value, divided by:

• The value of free estate before BR/AR less specific gifts of relievable property at unreduced value

The following example shows how IHTA84/S39A (3) and (4) apply where there is also a specific gift of relievable property. A more complicated example including four-stage grossing up (IHTM26152) can be found at IHTM26158.

Example

William’s free estate comprises of:

Control holding of unlisted shares (BR at 100%) = £500,000

Land and buildings occupied by the unlisted company (BR at 50%) = £300,000

House and chattels = £200,000

Other property = £500,000

Total = £1,500,000

By Will

• Unlisted shares to son (who bears any tax)

• House and chattels to widow

• £10,000 to charity

• Residue equally to widow and three children

Settled property valued at £250,000 is also chargeable on the death.

Stage 1

The value transferred is £850,000

(This is £1.5M less £650,000 BR, being 100% of £500,000 and 50% of £300,000. The settled property is excluded from the S39A calculations).

Stage 2

There is a specific gift of relievable property, that is the unlisted shares. Under IHTA84/S39A (2) this gift is taken at the value after BR, which is nil.

Stage 3

There is other relievable property not specifically given. There are other specific gifts, to the widow and charity, which have to be reduced by the IHTA84/S39A (4) fraction:

(£850,000 - nil) ÷ (£1,500,000 - £500,000), that is

£850,000(A) ÷ £1,000,000 (B) = 0.85

(A) = the reduced value of the free estate less the reduced value of the gift of unlisted shares

(B) = the unreduced value of the free estate less the unreduced value of the gift of unlisted shares.

The settled property is excluded from the fraction.

The reduced value of the gifts to the widow and charity are:

Widow

£200,000 × 0.85 = £170,000

Charity

£10,000 × 0.85 = £8,500

Total

(£170,000 + £8,500) = £178,500

Stage 4

No grossing up required

Stage 5

Calculate the residue using the reduced values:

Value transferred = £850,000

Gift of shares = Nil

Less exempt gifts - £178,500

Residue = £671,500

The widow’s exempt share (a quarter) = £167,875

Stage 6

The chargeable transfer of the free estate is:

value transferred = £850,000

less exempt gifts - £178,500

less exempt residue - £167,875

Chargeable transfer = £503,625

The total chargeable transfer on death is:

Free estate = £503,625

Settled property = £250,000

Total chargeable = £753,625