HMRC Inheritance Tax: Customer Guide

How do I calculate the tax on a lifetime transfer when there is fall in value relief and taper relief?

Where both fall in value relief and taper relief are due, you should follow the calculations in the following example.

Example

Gifts made by the deceased

Date of gift	Asset gifted	Value at date of gift	Amount and type of exemption claimed	Net value after exemptions
14/10/99	74 Acacia Gardens	100,000	6,000 (annual exemptions 99/00 and 98/99)	94,000
16/01/01	Cash	200,000	3,000 (annual exemption 00/01)	197,000
17/04/02	18 Lime Avenue Fall in value relief claimed, value at the date of death £130,000	150,000	6,000 (annual exemption 02/03 and 2001/02)	144,000

The deceased died on 14 July 2005. You need to go through the following calculations.

First gift 14 October 1999

The chargeable amount of the gift was £94,000. The tax threshold to apply is the threshold at death (£275,000). As the gift is below the threshold, there is no tax to pay on this gift so there can be no taper relief.

If the market value of the property had fallen between the date of gift and the date of death to, say £80,000, there would be no benefit in claiming fall in value relief because the gift is below the threshold.

The value that cumulates with all other transfers remains at £94,000.

Second gift 16 January 2001

The chargeable value of the gift was £197,000. The first gift must be added to it to establish the total value (£291,000) on which tax is charged. The tax threshold to apply is the threshold at death (£275,000). The tax payable on the second gift is

Taxable value		£291,000
less threshold		- £275,000
Chargeable value		£16,000
Tax at 40%		£6,400

 

The second gift was made more than four, but less than five years before the deceased died so taper relief is due at 40%. 40% of £6,400 is £2,560, so the tax to be paid is £6,400 – 2,560 = £3,840.

Third gift 17 April 2002

The chargeable amount of the gift was £144,000. The first two gifts must be added to it to establish the total value (£435,000) on which tax is charged. The tax threshold to apply is the threshold at death (£275,000). The tax payable on the third gift is

Taxable value		£435,000
Less fall in value relief (150,000 – 130,000 )		- £20,000
Less threshold		- £275,000
Chargeable value		£184,000
Tax at 40%		£56,000
Less tax on second gift		- £6,400
Tax to pay		£49,600

 

The third gift was made more than three, but less than four years before the deceased died so taper relief is due at 20%. 20% of £49,600 is £9,920, so the tax to be paid is £49,600 – 9,920 = £39,680.

Fall in value relief has been deducted in working out the tax that is payable on the third gift, but it does not reduce the value of the gifts that are added to the estate at death. This remains at £435,000.