IHTM25313 - Business relief: Replacement property: Limitation of relief
When the replacement property (IHTM25311) provisions apply, IHTA84/S107 (2) restricts business relief by providing that the relief shall not exceed what it would have been had the replacement or any one or more of the replacements not been made. For this purpose a replacement resulting from the formation, alteration or dissolution of a partnership, or from the acquisition of a business by a company controlled by the former owner of the business, is to be disregarded, IHTA84/S107 (3).
IHTA84/S107 (2) is an anti-avoidance provision and its purpose is to prevent a person who has qualified for relief from purchasing a much more expensive property shortly before death or making a transfer.
Your approach to IHTA84/S107 (2) should be practical. If there is any indication that the deceased's/transferor's resources were being rearranged into considerably more extensive business property to obtain increased relief on the death/transfer, you should refer the case to Technical. Otherwise you should adopt a reasonable approach aimed at quantifying and agreeing the restricted relief in a practical way. The approach you should adopt is illustrated by two examples: one which deals with the equivalent provisions for replacement property in an agricultural relief case (IHTM24113), and another which involves agricultural and business relief (IHTM24114).
Note that this provision also limits relief where property which qualified for 50% relief is replaced by property which qualifies for 100% relief.
Example
Tunde owns shares which are listed on the Alternative Investment Market (AIM) and are worth £500,000. On 7 February 2026, he sells these and purchases shares in an unlisted company for £600,000, which qualify for relief at 100% subject to the availability of the 100% relief allowance (IHTM25500). Tunde dies on 9 August 2027 when the new shares he has purchased are worth £800,000. AIM shares attract relief at 50% and using the apportionment approach in IHTM24113, relief on the AIM shares would have be limited to:
£500,000/£600,000 x £800,000 = £666,666 x 50% = £333,333
This is the maximum amount of relief that can be applied to the new shares. If Tunde had survived until 7 February 2028, full relief would be available as he would then have owned the new shares for the required two years.