SVM111280 - IHT Business Property Relief: Replacement provisions
The requirement that the original property should be retained by the transferee is relaxed, firstly by section 113A(6) IHTA 1984 where as a result of a reorganisation and so on, new shares have been issued in place of those originally transferred and secondly by section 113B IHTA 1984 where the transferee has disposed of the property originally transferred but replaced it with other qualifying property.
Replacement shares
Section 113A(6) IHTA 1984 applies where shares owned by the transferee immediately before the death of the transferor (or earlier death of the transferee) either
a. were received by the transferee as a result, broadly, of a reorganisation of share capital or take-over bid and would under any of the provisions of sections 126-136 Taxation of Chargeable Gains Act (TCGA) 1992 be identified with the shares (or part of them) received by the transferee under the transfer
or
b. were issued to the transferee in consideration of the sale to the company of the business, or interest in a business, consisting of some or all of the original property.
Where these conditions are satisfied the shares are treated for the purposes of section 113A IHTA 1984 as the original property.
Example
A gives his son 1,000 £1 shares in Z Ltd. The company splits its share capital and the original holding transferred is represented by 10,000 10p shares at the date of A’s death. The new holding is treated as the original property. If company Z had been taken over by company Y so that at A’s death the original holding was represented by 500 £1 shares in Y Ltd, the new holding would also be treated as the original property.
Replacement property generally
Section 113B IHTA 1984 relaxes the conditions in section 113A IHTA 1984 to preserve the relief where, very broadly, the transferee has sold all or part of the original property and invested the whole of the proceeds in the purchase of qualifying business property.
Section 113B IHTA 1984 provides that if all the following conditions are satisfied relief is available.
1. The whole of the consideration received on the disposal must have been applied by the transferee in acquiring other property.
2. The other property is acquired, or a binding contract for its acquisition is entered into, within three years of the disposal or such longer period as the Board may allow.
3. The disposal and acquisition are both made in transactions at arm’s length or on terms such as might be expected to be included in a transaction at arm’s length.
4. Subject to the comments regarding the three year period below, the other property is owned by the transferee immediately before the transferor’s death or, where that is earlier, the transferee’s death, and is not, at that time, subject to a binding contract for sale.
5. Throughout the period from the date of the chargeable transfer to the date of death (ignoring any period between disposal and acquisition) the transferee owned either the property originally given (including any property deemed to be the property originally given under section 113A(6)) IHTA 1984 or the other property.
6. Relief would have been available (ignoring the minimum period of ownership provisions) in respect of the other property had it been disposed of by the transferee immediately before the death. This rule applies whenever the transferor/transferee dies. Section 184 Finance Act 1996 did not amend this requirement in respect of replacement property.
The three year period may extend beyond the transferor’s death, the condition at (4) above not applying where the original property has been disposed of before the death and replacement property is acquired or contracted for within three years of the disposal or such longer period as the Board allows.
If the replacement property consists of shares and the share capital is re-organised or the company is taken over in exchange for other shares before the death, the shares received in substitution are treated as the replacement property.
Property is treated as disposed of at the time a binding contract for its disposal is entered into.
Example
B gives shares in an unquoted trading company, ABC Ltd, to his daughter in May 2025. In March 2026, the daughter sells the shares in an arm’s length transaction and in August 2026 reinvests all the proceeds of sale in another unquoted trading company, XYZ Ltd. B dies in June 2027. The failed Potentially Exempt Transfer (PET) qualifies for relief as the daughter owns the replacement shares at B’s death and they were then relevant business property. 100% BR will be available in respect of the failed PET together with any other qualifying assets up to an allowance of £2.5m. Any excess would then receive relief at 50%. This is because the gift was made after 30 October 2024 and the death was after 6 April 2026.
Additional Guidance: SVM150000