Taxation (UK) · The basic principles of computing transfers of value

Transfers of Value and the Loss to the Donor Principle

Updated 11 October 2026 · Fact-checked

A transfer of value is measured by the fall in the donor's estate, not by what the recipient gains. Value the estate before the gift, value it after, and take the difference. Related property can raise the 'before' value, and the donor's costs of making the gift are added to the transfer.

Understand Transfers of Value and Loss to the Donor Principle

Inheritance tax (IHT) does not tax what the person receiving a gift gets. It taxes the loss to the donor. The donor is the person making the gift. The transfer of value is the amount by which the donor's estate falls because of the gift.

The method is simple. Value the donor's estate immediately before the transfer. Value it immediately after. The fall is the transfer of value. Often the recipient's gain and the donor's loss are the same. They differ when the gift changes the value of what the donor keeps.

The classic case is related property. Related property is property of the donor's spouse or civil partner. It also includes property that the donor or their spouse or civil partner gave to a charity or other qualifying exempt body, if that body still holds it or held it within the last five years. Related property is valued by combining it with the donor's own holding. A bigger holding is usually worth more per unit, such as shares giving control. So if a gift breaks up a holding, the donor can lose much more than the value of what was given away.

The second adjustment is associated costs. If the donor pays the costs of making the gift, such as legal fees, or pays any IHT on it, the donor's estate falls by more. The transfer of value is the gross loss, including these costs.

Note that a transfer of value only becomes a PET, or a chargeable lifetime transfer, once you know the type of gift. Exemptions are then deducted. This topic only fixes the starting figure.

Key rules to remember

Transfer of value: Transfer of value = Value of donor's estate before − Value of donor's estate after; Both values are taken immediately before and after the gift. Do not use the recipient's gain.
Related property valuation: Value of donor's shares = Value of combined holding × (Donor's shares ÷ Combined shares of donor and related property); Use this to value the donor's own shares before the transfer. Value the combined holding (donor plus related property) as one block, then apportion it to the donor's shares by number of shares. Related property includes the spouse's or civil partner's property.
Associated costs: Total transfer of value = Fall in value of estate + Costs paid by donor; If the donor pays the costs of the gift, add them. If the recipient pays them, they are not added.
Lifetime IHT rate on excess over nil rate band: Lifetime rate 20%, death rate 40%, nil rate band £325,000; Given in the exam's tax rates. Needed once the transfer of value is found. The costs are included before tax is worked out.

How to solve Transfers of Value and Loss to the Donor Principle questions

Use this order for any transfer of value question. It stops you from using the recipient's gain by mistake.

1Identify the donor, the asset gifted and the date of the gift.
2Value the donor's estate immediately before the gift. Check whether a spouse or civil partner holds related property, and if so value the combined holding and take the donor's share.
3Value the donor's estate immediately after the gift. Again apply related property if the spouse's holding is combined with what the donor keeps.
4Deduct the 'after' value from the 'before' value. This is the fall in estate.
5Add any costs the donor pays, such as legal fees, or any IHT the donor pays on the gift.
6State the transfer of value clearly. Then label the gift as a PET or CLT and deduct exemptions only if the question asks.
7Check your answer is the donor's loss, not the recipient's gain.

Quickest way: Before-and-after shortcut

When to use it: Use it for objective test questions where one gift changes the value of the donor's remaining holding.

Write 'Before' and 'After' on your scratch paper.
Put the donor's holding value in each column, using related property where it applies.
Subtract. Add donor-paid costs.
Compare to the options. If one option equals the value of the gift alone, it is usually the trap.

Common mistakes in Transfers of Value and Loss to the Donor Principle

Using the value of the asset received by the recipient as the transfer of value.
It feels natural to tax what is given away.
Fix: Always do before minus after for the donor. The two figures may differ.
Ignoring the spouse's holding when valuing shares.
Students treat the donor and spouse as separate people for all purposes.
Fix: For IHT valuation, combine the donor's property with related property before valuing. Check the spouse's holdings in the question.
Valuing only the shares given away on a combined basis, not the shares kept.
Students forget the 'after' value also changes.
Fix: Value both the before and after holdings, using related property in each if it applies.
Leaving out costs of the gift paid by the donor.
The costs are often in a short sentence at the end.
Fix: Add legal and similar costs paid by the donor to the fall in value. If the recipient pays them, do not add them.
Deducting exemptions before finding the transfer of value.
Students jump to the tax calculation.
Fix: Find the gross transfer of value first. Then deduct exemptions in the next step, in the order the question needs.

Worked examples

Example 1

Anna owns 600 of the 1,000 ordinary shares in X Ltd. Her husband owns none. Anna gives 200 shares to her son. Before the gift her 600 shares are worth £10 each; after, her 400 shares are worth £4 each. Anna pays no costs. Find the transfer of value.

Show the solution

Before: 600 shares × £10 = £6,000.
After: 400 shares × £4 = £1,600.
Fall in estate = £6,000 − £1,600 = £4,400.
No costs paid, so nothing to add.

Answer: The transfer of value is £4,400. This exceeds the £2,000 value of the 200 shares given away at the pre-gift price (200 × £10), because the gift cut Anna's control and lowered the value of the shares she kept.

Example 2

Ben owns 30% of Y Ltd's shares. His wife owns 25%. The total shares are 1,000. A 55% holding is worth £20 per share. A 30% holding alone is worth £8 per share. Ben gives 100 shares (10%) to his daughter. After the gift, Ben holds 20% and his wife 25%, a combined 45% holding worth £11 per share. Ben pays legal fees of £300. Find the transfer of value.

Show the solution

Before: Ben's 300 shares are valued as part of the combined 55% holding, so 300 × £20 = £6,000.
After: Ben's 200 shares are valued as part of the combined 45% holding, so 200 × £11 = £2,200.
Fall in estate = £6,000 − £2,200 = £3,800.
Add legal fees paid by the donor: £3,800 + £300 = £4,100.

Answer: The transfer of value is £4,100.

Exam tips

Write 'before' and 'after' on every question. It earns method marks in Section C and prevents errors in objective questions.
Read the question for the spouse or civil partner's holdings. Their mention usually signals related property.
Check who pays the costs. Only donor-paid costs increase the transfer.
Show the transfer of value as a separate line before any exemptions or the nil rate band of £325,000.

Practice questions from The basic principles of computing transfers of value

Transfers of Value and Loss to the Donor Principle: frequently asked questions

What is the loss to donor principle?

It means IHT is measured by how much the donor's estate falls because of a gift. It is not measured by what the recipient receives. The two amounts can differ.

What is related property for IHT?

It is property owned by the donor's spouse or civil partner, and some property held by charities after being given by the donor or spouse. It is combined with the donor's own property when valuing, such as shares.

Do I add the cost of making a gift to the transfer of value?

Yes, if the donor pays the costs, such as legal fees. The donor's estate falls by that extra amount. If the recipient pays them, nothing is added.

Is the transfer of value the same as the tax payable?

No. The transfer of value is the starting figure. You then deduct exemptions, use the nil rate band and apply the rate of tax, which is 20% for lifetime and 40% on death.