Section 13: transfer within seven years before death relief for falls in market value
The Valuation Office Agency's (VOA) technical manual relating to Inheritance Tax.
Introduction
A lifetime transfer of value may be immediately chargeable, potentially exempt or exempt (see Section 4 Part 1). It may also be taxable as a gift with reservation (see Section 6 para 6.11).
Before considering the relief available under s.131 (amended by para 23 Sch 19 FA 1986) where the market value of property transferred has fallen between a lifetime transfer and the subsequent death of the transferor within seven years thereafter, it is necessary to understand the charging provisions of s.7 (as amended by para 2 Sch 19 FA 1986).
On an immediately chargeable lifetime transfer, IHT is charged at half the rates applicable for transfers made on death. The tax is based on the transferor’s cumulative total of transfers (other than exempt transfers), including the value transferred by any immediately chargeable lifetime transfer in the previous seven years, subject to any deductions for exemptions, reliefs, mortgages etc.
If the transferor dies within seven years of the immediately chargeable lifetime transfer or potentially exempt transfer (PET), tax will be calculated or re-calculated at the full rate but will be tapered for transfers more than three years before death s.7(4) as inserted by para 2(4) Sch 19 FA 1986. The tax is based on the transferor’s cumulative total at the date of the lifetime transfer, including the addition in respect thereof, but any tax or as the case may be additional tax will normally be payable by the transferee (though not a liability of the transferor it may, exceptionally, be collected from his or her personal representatives - s.199(2), as amended).
IHTA 1984 sections are referred to in the remainder of this Section and may include references to amending legislation.
Relief for falls in value between date of gift and death or earlier sale by donee
The provisions of s.131 as extended by para 23 Sch 19 FA 1986 can reduce the tax or, as the case may be the additional tax payable on a lifetime transfer, where the transferor dies within seven years of the transfer, if the market value of the gifted property has fallen between the date of the lifetime transfer and the transferor’s death: or, if earlier, the date of a “qualifying sale” by the transferee (the donee) or spouse.
The person liable to pay the tax or additional tax has to make a claim for relief and HMRC(CT) will decide if the conditions of s. 131 are satisfied. There is no time limit within which a claim has be made other than the six year period under s.241. Any claim made direct to the DV should be forwarded to the HMRC(CT). The claimant should be informed of the action taken, but the DV should not comment on the claim itself.
The conditions set out in s.131(1) are that all or part of the value transferred by the lifetime chargeable transfer is attributable to the value of the property which:
-
“is, at the date of the death, the property of the person (“the transferee”) whose property it became on the transfer or of his spouse, or
-
has, before that date, been sold by the transferee or his spouse by a qualifying sale.”
S.131 (3) provides that a sale is a “qualifying sale” if:
-
it is at arm’s length for a price freely negotiated at the time of the sale; and
-
the vendor and purchaser are not connected; and
-
the vendor (or any person having an interest in the proceeds of sale), does not have any right to repurchase.
HMRC(CT) may require advice from the DV with regard to (a) above and to be informed should the DV know that the parties are connected.
Form of Relief
By s.131(2) if the “market value” of the property transferred by the lifetime chargeable transfer at the date of that transfer exceeds its “market value” at the relevant date (see para 13.16 below), the additional tax payable by the transferee is calculated as if the value transferred by the lifetime chargeable transfer were reduced by the amount of the fall in the “market value” of the property transferred.
S.131(2A) inserted by para 23(3) Sch 19 FA 1986 provides that if the gifted property is entitled to either business or agricultural relief, the value of the asset at the two relevant dates is reduced by the percentage of business or agricultural relief applicable to the value transferred for the purposes of calculating the fall in value relief.
By s.131(1) the relevant date is either: ◦ the date of death; or, if earlier, ◦ the date of any “qualifying sale” by the transferee or by the transferee’s spouse (see para 13.10 above).
Valuation for s.131 purposes
For the purposes of ss.131 and 203 (see Section 14) the “market value” at any time of any property is the price which the property might reasonably be expected to fetch if sold in the open market at that time; but the price shall not be assumed to be reduced on the ground that the whole property is on the market at one and the same time. If the property transferred is unquoted shares or securities s. 140(2)(b) applies.
Primary valuations to be supplied by DV
The DV will be asked by HMRC(CT) for the “market value” of the property transferred by the lifetime transfer as at the date of that transfer and at the relevant date (see para 13.22 below). “Market value” should be ascertained in accordance with the principles set out in para 13.17 above and because only the property transferred has to be valued the concept of loss to the transferor is not applicable.
The DV may have previously reported the “value transferred” by the lifetime transfer, including the “value of the property transferred” if a depreciation to other property in the transferor’s estate resulted from the lifetime transfer. Alternatively HMRC(CT) may refer the lifetime transfer case with the S.131 claim. Provided that lifetime transfer does not involve the application of any of the special valuation provisions (see 13.20 below and Section 7) the DV should confirm that the “market value” of the property transferred is the same as the “value transferred” or, where appropriate the same as “the value of the property transferred” by the lifetime transfer. This is necessary because HMRC(CT) may not always know if the DV’s valuation for the lifetime transfer is affected by any of the special valuation provisions.
If the DV’s valuation for the lifetime transfer involved the application of any of the special valuation provision such as:
s.163 (restriction on freedom to dispose)
s.161 (related property)
s.170 (value of lessor’s interest)
s.169 (farm cottages)
the property transferred should be revalued on the basis of its “market value”, without applying such provisions. The DV should report to HMRC(CT) his or her opinion of the “market value” at the date of the lifetime transfer of the property transferred, see section 27 para 27.73.
Exceptionally, HMRC(CT) may have adopted a valuation of a property transferred by a lifetime transfer which has not been referred to the DV. In such circumstances the DV will not be bound by this valuation as HMRC(CT)’s acceptance of it will have been exclusively for the purposes of the lifetime transfer. HMRC(CT) will therefore require the DV’s opinion of the “market value” of the property transferred at the date of the lifetime transfer, see section 27 para 27.73.
HMRC(CT) will require the DV’s opinion of the market value at the relevant date, (i.e. either the date of death or the date of an earlier qualifying sale) of the property transferred by the lifetime transfer in those cases where either (a) there have been no changes in the relevant conditions (see para 13.27 below) between the date of the lifetime transfer and the relevant date or (b) any such changes have decreased the market value of the gifted property, see section 27 para 27.73.
If the changes in the relevant conditions have increased the market value of the gifted property see para 13.35 below for the adjustment to be made to the market value at the relevant date.
On receipt of the DV’s valuation HMRC(CT) will adjust the value transferred by the lifetime chargeable transfer in order to calculate the reduction under s.131(2) in the additional tax payable by the transferee following the transferor’s death within seven years of the lifetime transfer.
Adjustment for changes between date of gift and relevant date
In order to ensure that like is compared with like when contrasting the “market value” of the gifted property at the date of the lifetime gift and the relevant date (ie the date of the transferor’s death or earlier “qualifying sale” by the transferee or the transferee’s spouse) adjustments are made by s.137 to the market value of the gifted property relevant date to take account of any changes between the two dates, in the conditions set out in para 13.27 below.
An adjustment is necessary if the conditions set out in s.137(2) are not the same at the date of the chargeable transfer (the date of the gift) and the relevant date.
The conditions are that:-
-
the interest was the same, and with the same incidents, at both dates; and
-
the land in which the interest subsists was in the same state with the same incidents at both dates.
Matters to be considered under (a) will include the tenure or terms of tenure of the interest, and occupation; and under (b) the physical state of the land and any proprietary rights (easements, etc.) enjoyed by or affecting it.
HMRC(CT) will ascertain and notify to the DV, when submitting a s.137 case, any changes which have occurred in the interest in the property transferred by the lifetime gift or its incidents and in any incidents applicable to the land itself. They may require the assistance of the DV and this should be given as far as possible using office records.
The DV will be responsible for advising HMRC(CT) if any changes have occurred in the physical state of the land. Advice may be requested either as a preliminary enquiry or when the formal reference is made for valuations under s.137.
The state of the land at the date of the lifetime transfer should be ascertained as far as possible from inspection notes made for the lifetime transfer case (if referred to the DV) and from office local taxation or other records.
The state of the land at the relevant date, if this is the date of a “qualifying sale” should be ascertained by reference to office records and making such inspection as is necessary (see para 13.51).
If the relevant date is the date of the transferor’s death the state of the land at that date will be ascertained by inspection. If exceptionally a s.131 claim for relief is referred by HMRC(CT) some time after a death, which did not warrant an inspection, the state of the land at the date of death should be ascertained by reference to office records and making such inspection as is necessary (see para 13.51 below).
Changes in the state of the land, including any property situated upon it, relate only to physical changes in the state or condition of the land or property transferred by the lifetime gift, and any proprietary rights (easements etc.) enjoyed by or affecting it.
When reporting a s.137 case the DV should set out briefly any changes in the state of the land which, to the DV’s knowledge, have taken place between the date of the lifetime transfer and the relevant date. Only changes which have had a material effect on value need to be reported to HMRC(CT).
Changes in planning circumstance affecting or planning permissions attaching to the property transferred by the lifetime gift are not changes for which an adjustment is made under s.137, unless compensation has become payable to the transferee or to the transferee’s spouse after the date of the lifetime transfer and before the relevant date (see para 13.40 below). Thus if land at the date of the lifetime transfer had valuable prospects of being granted planning permission which had evaporated by the relevant date, the fall in value due to the changed planning circumstances would not be a change for which an adjustment is made under s.137. This has the effect of allowing relief for a fall in value which is due to a planning situation being less favourable at the relevant date than at the date of the lifetime transfer.
Any changes in the state of adjoining or neighbouring land, its legal interest, incidents, or planning circumstance are not changes for which adjustments are made under s.137.
For example, if at the relevant date a property has been seriously depreciated in value because an adjoining house has, since the date of the lifetime transfer, been converted into a club with a very rowdy membership, this being a change in the state of adjoining land no adjustment will be made under S.137. The practical effect of this will be to allow relief for this fall in value as it is attributable to a change in the state of other land.
The way in which the adjustment is made to the market value of the gifted property at the relevant date in order to ascertain its value for the purposes of calculating s.131 relief depends on whether the changes in the relevant conditions (see para 13.27 above) have increased or decreased the market value of the gifted property. In decrease cases the valuation date of the adjustment calculation is the date of the lifetime transfer and in increase cases it is the relevant date. In both cases the adjustment valuations are made on the basis of hypothetical assumptions relating to the relevant conditions. (See paras 13.34 and 13.35 below)
If the overall effect of the changes in the relevant conditions is a decrease in value, then by s.137(1) the market value of the gifted property at the relevant date is correspondingly increased. This addition is equal to the difference between:
- the market value of the gifted property at the date of the lifetime transfer, and
- the market value of the gifted property as at the date of the lifetime transfer, on the assumption that the interest with any incidents affecting it and the state of the land with any incidents affecting it were such as existed at the relevant date; (but see paras 13.40-43 below concerning the disregarding of certain events for which compensation has become payable between the date of the lifetime transfer and the relevant date).
Valuation (a) will usually coincide with the value of the property transferred if previously reported to HMRC(CT) in connection with the lifetime transfer, but if it does not, it will have been reported under para 13.20 above.
Valuation (b) will involve reassessing the market value of the gifted property as at the date of the lifetime transfer assuming the existence at that date of the prescribed circumstances (see (b) above) which prevailed at the relevant date.
Should the DV find that valuation (b) is greater than (a) then the overall effect of the changes in the relevant conditions has been to increase the value and s.137(4) will apply instead (see para 13.35 below). In such circumstances the DV should make a valuation on the basis of s.137(4) and inform the HMRC(CT) accordingly when reporting.
Example where changes have decreased the value
| Lifetime transfer: | 15 May 2000 | |
| Date of death: | 12 August 2005 (the relevant date) | |
| Property: | Freehold dwelling house (the gifted property) | |
| 15 May 2000: | Market value with vacant possession | £160,000 |
| 12 August 2005: | Property still owned by transferee, but then subject to an annual tenancy. | |
| Market value at the relevant date | £130,000 | |
| Addition to market value of gifted property at the relevant date by s.137(1) | ||
| (a) Market value at the date of the lifetime transfer | £160,000 | |
| (b) Market value at that date, assuming the property is tenanted | £140,000 | |
| Difference | £20,000 |
Market value of the gifted property at the relevant date adjusted for the change in a relevant condition is £150,000 (market value at the relevant date £130,000 + £20,000 difference).
Therefore the excess of the market value of the gifted property at the date of the lifetime transfer (£160,000) over the adjusted market value at the relevant date (£150,000) is £10,000.
For calculating the tax or, as the case may be the additional tax due under s.7 (para 2 Sch 19 FA 1986) the value transferred by the lifetime chargeable transfer is reduced to £150,000 (£160,000 - £10,000 excess).
If the overall effect of changes in the relevant conditions is an increase in value then by s.137(4) the market value of the gifted property at the relevant date is correspondingly reduced to what it would have been on the assumption that, at the relevant date, none of the changes had occurred. In this case, therefore, the interest is valued on the open market basis as at the relevant date on the assumption that the interest with any incidents affecting it and the state of the land with any incidents affecting it were such as existed as at the date of the lifetime transfer; (but see paras 13.40-43 below concerning the disregarding of certain events for which compensation has become payable between the date of the lifetime transfer and the relevant date).
Example where changes have increased the value
| Lifetime Transfer: | 18 April 2002 | |
| Qualifying Sale: | 28 December 2003 (the relevant date) | |
| Date of Death: | 18 June 2005 | |
| Property: | Freehold cottage (the gifted property) | |
| 18 April 2002: | Market value with vacant possession | £140,000 |
| 28 December 2003: | Cottage, having been improved by the addition of a bathroom and garage sold by a qualifying sale with vacant possession for: | £175,000 |
Reduction of market value of gifted property at the relevant date by s.137(4)
| Market value as at the relevant date (the date of the qualifying sale) assuming that the cottage is for sale with vacant possession but unimproved and without garage (i.e. adjusted for the changes in the relevant conditions) is | £130,000 |
| Therefore the excess of the market value of the gifted property at the date of the lifetime transfer (£140,000) over the adjusted market value at the relevant date (£130,000) is | £ 10,000 |
Note: the values adopted in the above example are solely to illustrate the principles involved in an assumed fall in value situation.
Compensation becomes payable after the gift but before the relevant date for certain planning restrictions or other injuries.
If, under any enactment, compensation becomes payable to the transferee or the transferee’s spouse after the date of the lifetime transfer but before the relevant date because restrictions are imposed on the use or development of the land or property transferred by the lifetime transfer or because the value of the transferee’s interest is reduced for any other reason, then by s.137(3) the imposition of the restriction or the other cause of the reduction in value of the interest shall be ignored when any adjustments are made under s.137 for relevant changes (see para 13.26 above) between the date of the lifetime transfer and the relevant date.
HMRC(CT) will decide whether, before the relevant date, such compensation has become payable to the transferee or the transferee’s spouse, and when referring the case to the DV for valuation assistance will give full particulars of any restriction imposed on, or the source or cause of any injury to, the transferee’s property and the amount of any compensation received or agreed to be payable.
The DV in making a valuation on either the decreased value basis (para 13.34 above) or the increased value basis (para 13.35 above) should ignore the value effect of all matters for which compensation has become payable.
HMRC(CT) may seek information from the DV as to the amount of compensation paid or agreed to be paid in respect of such restrictions or sources of injury affecting the property transferred by the lifetime transfer. The DV should supply such information as is available from office records and, if it is known that the amount of compensation has not been determined, HMRC(CT) should be informed.
In accordance with s.137(3) HMRC(CT) will add to the market value of the gifted property as at the relevant date the amount of any such compensation which has become payable to the transferee or to the transferee’s spouse in order to arrive at the “adjusted” market value (see para 13.26 above).
Adjustment for reduction in lessee’s term between the date of gift and the relevant date
If the interest transferred by the lifetime transfer is that of a lessee who, at the date of the transfer, held an unexpired term not exceeding 50 years, an addition is made to the market value of the property transferred at the relevant date in accordance with the formula set out in s.138. This adjustment will be made by HMRC(CT) and the DV will not be involved in the application of the formula.
Reference of cases by HMRC(CT)
Where asking the DV for valuation or other assistance in connection with the operation of ss.131-140 (as amended by para 23 Sch 19 FA 1986), HMRC(CT) will advise the DV of:
- the name of the transferor, the date of the lifetime transfer, and the DV’s reference (if any). If the lifetime transfer was not referred to the DV for valuation advice HMRC(CT) will state the figure, if any, accepted as the value of the property transferred by the lifetime chargeable transfer (see para 13.21 above);
- the name, address and telephone number of the transferee or agent, if any;
- any case in which the required valuations are not to be notified by the DV to the parties;
- the relevant statutory provisions;
- the purpose for which the information or valuation is required;
- the address or other identification of the property transferred by the lifetime transfer, including a plan if necessary;
- the relevant date, and
(i) if this is the date of the transferor’s death and the case was referred earlier, the DV’s reference (if known): or
(ii) if this is the date of a qualifying sale, the interest sold and if not the fee simple, particulars of the duration and main terms of the lease or tenancy sold, together with details of any incidents appertaining to the interest sold stating whether with vacant possession or if not giving full particulars of the tenancies etc;
-
whether there have been any changes in the gifted interest, its incidents or the incidents attaching to the gifted land between the date of the lifetime transfer and the relevant date; and
-
any other information likely to be of assistance to the DV, such as statements by the parties relating to changes in circumstance or in the state or condition of the property between the date of the lifetime transfer and the relevant date.
In cases in which s.137(3) applies HMRC(CT) will additionally inform the DV of:
(i) the amount of compensation paid or agreed to be paid for planning restrictions; (see also para 13.42)
(ii) the Act and Section under which the entitlement to compensation was authorised;
(iii) particulars of the restrictions or injury for which compensation became payable; and
(iv) the name of the person or body liable to pay the compensation.
The DV’s authority to inspect is contained in s.220(1). While there may be doubts that there is authority to reinspect after a value has been determined, a claim under s.131 will lead to the determination of a new value with associated rights of appeal. The DV should therefore carry out any necessary inspection before making any valuations required under s.131.
It may be necessary to make an inspection which involves entry on a property which has been sold or to make an enquiry of a tenant or purchaser. For tax confidentiality reasons where doing so no information as to the reasons for valuation should be given to any person other than the taxpayer or their representative.
If any difficulties are encountered in arranging an essential inspection the papers should be returned to HMRC(CT) with a covering memorandum setting out the full facts.
Any s.131 “falls in value” case received from HMRC(CT) should be treated as a new case. If any such case is referred back again by HMRC(CT) it should be registered with credit type 03.
The case type allotted to the original lifetime transfer if referred to the DV should be maintained.