IHTM26101 - Step 3 - interaction: introduction


When the value of an estate is reduced by business relief ( IHTM25131) or agricultural relief ( IHTM24001), its value for IHT purposes is less than its actual net assets value. In such cases, where the deceased bequeathed specific gifts ( IHTM26003), rules known as the interaction rules apply. The example below illustrates the situation.

Example

T’s estate consists of :-

a farming business£800,000
other non-relievable property£600,000
total value£1,400,000
less relief at 100% on £800,000-£800,000
IHT value of estate =£600,000

By will

A pecuniary legacy to spouse of £550,000, residue to the children

In the above example how should the chargeable residue be calculated? The actual benefit to the children is £850,000. But if the full amount of the widow’s legacy of £550,000 was deductible from £600,000, the value of the estate for IHT, (the chargeable residue) would be only £50,000, which is well below the tax threshold.

The rules ( IHTM26103) of interaction for dealing with this type of situation are contained in IHTA84/S39A.