IHTM26101 - Step 3 - interaction: introduction

When the value of an estate is reduced by business relief (IHTM25131) or agricultural relief (IHTM24001), its value for Inheritance Tax (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

Barry’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 farming business -£800,000

IHT value of estate = £600,000

By his Will, Barry leaves a pecuniary legacy to his spouse of £550,000, with the residue to the children.

How should the chargeable residue be calculated in this example? 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.