Advanced Taxation (UK) · Inheritance tax: the scope of inheritance tax

Related Property and Valuation of Transfers for IHT

Updated 11 October 2026 · Fact-checked

For IHT, a transfer is valued by the loss to the donor's estate, not the gain to the donee. Related property, such as spouses' or civil partners' holdings, is valued as a proportion of the combined holding. If the donor pays the tax, the net gift is grossed up at 20% (net ÷ 0.8) after the nil rate band.

Understand Related Property and Valuation of Transfers

Inheritance tax is charged on a transfer of value. The amount is the fall in the donor's estate, not what the donee receives. This is the loss to donor principle. Usually the two are the same. They differ when the gift reduces the value of assets the donor keeps.

The classic case is a gift of shares that cuts a controlling holding. Say you hold 60% of a company and give away 20%. Your estate falls by the value of a 60% holding less the value of the 40% holding you keep. That difference can be far more than the value of a 20% holding on its own. Always value the estate before the gift and after it.

Related property stops couples reducing value by splitting holdings. Property owned by your spouse or civil partner is related to your property. Property is also related if it is the subject of an exempt transfer (for example to a charity, a political party or a national body) made by you or your spouse after 15 March 1983, and it is still held by the recipient or was so held within the last five years. Your holding is valued as its proportion of the combined value of all the related property. A 30% holding for each spouse is valued as half of a 60% holding, not as a 30% holding. This often gives a higher value, and it applies even if only one spouse makes the gift.

For tax, a chargeable lifetime transfer may be made with the donor paying the tax. Then the gift is a net amount. The tax is itself a loss to the donor's estate. So you gross up the gift. Only the part above the available nil rate band is grossed up. The lifetime rate is 20%, so the gross amount is the net excess ÷ 0.8.

If the donee pays the tax, no grossing up is needed. The transfer of value is the gift itself, after any exemptions.

For quoted shares, value them at the lower of (i) the quarter-up price and (ii) the average of the highest and lowest marked bargains for the day, excluding bargains at special prices. The exam gives you the prices you need to apply this rule.

Key rules to remember

Loss to donor: Transfer of value = Value of estate before − Value of estate after; Use this for gifts that reduce a holding, for example shares. Add any tax the donor pays.
Related property valuation: Value of holding = (Holding ÷ Combined related holding) × Value of the combined holding; Spouse and civil partner holdings are related. Value the combined holding first, then apportion it.
Gross up of a lifetime transfer: Gross transfer = Net transfer ÷ 0.8 (for the amount above the nil rate band); Applies when the donor pays the lifetime tax at 20%. Gross up only the excess over the available nil rate band.
Lifetime tax: Tax = (Gross chargeable transfer − Available nil rate band) × 20%; Nil rate band is £325,000 less chargeable transfers in the previous seven years. Donee pays: no gross up.
Quoted share price: Lower of: quarter-up price, or average of highest and lowest marked bargains; Quarter-up = lower price + ¼ × (higher − lower) of the quoted pair.

How to solve Related Property and Valuation of Transfers questions

Use this order for any valuation or lifetime transfer question.

1Identify the asset and who holds it. Note any shares, spouse holdings or other related property.
2Value the donor's estate immediately before the gift, applying related property rules where relevant.
3Value the estate immediately after the gift, again using related property where relevant. The fall is the loss to donor.
4Deduct exemptions in the correct order, such as the annual exemption and the earlier year's unused exemption, as the question dictates.
5Decide who pays the tax. If the donee pays, stop at the net transfer. If the donor pays, go to the next step.
6Work out the available nil rate band, using chargeable transfers in the previous seven years.
7Gross up the net amount above the nil rate band at 20%. Net excess ÷ 0.8 gives gross excess. Add back the amount covered by the nil rate band.
8Compute the tax and show the gross chargeable transfer. State it clearly.

Quickest way: Before, after, then gross up

When to use it: Use when the exam gives share holdings, spouse holdings and a donor-pays lifetime transfer in one question.

Write related property holdings in a small table with percentages and values.
Write 'before' and 'after' values and subtract.
Subtract exemptions.
Test the net transfer against the nil rate band. If it fits, there is no tax.
If there is an excess, divide it by 0.8 and then add the nil rate band used. Check: gross tax = 20% of the gross excess.

Common mistakes in Related Property and Valuation of Transfers

Valuing the gift as the value of the shares given away, ignoring the shares kept.
Students focus on what the donee receives.
Fix: Always compute estate before and after. The loss to donor is the difference.
Ignoring the spouse's shares when valuing a holding.
Spouses are separate taxpayers, so students treat holdings separately.
Fix: Check for related property every time. Combine holdings, value the total, then apportion.
Grossing up the whole transfer, including the part covered by the nil rate band.
Students apply ÷ 0.8 mechanically.
Fix: Gross up only the net excess over the available nil rate band.
Grossing up when the donee pays the tax.
Students forget to read who bears the tax.
Fix: Highlight who pays. Donee pays means no gross up, and the tax is 20% of the excess over the nil rate band.
Using the wrong nil rate band by ignoring transfers in the previous seven years.
Students use £325,000 as a fixed figure.
Fix: Deduct chargeable transfers made in the seven years before the gift, then apply the rate.

Worked examples

Example 1

Amir owns 60% of Zed Ltd. His wife owns no shares. A 60% holding is worth £600,000 and a 40% holding is worth £280,000. Amir gives 20% of Zed Ltd to his son, who is the only person receiving a gift. Ignore exemptions and prior transfers. Compute the transfer of value.

Show the solution

Estate before the gift: 60% holding = £600,000.
Estate after the gift: 40% holding = £280,000.
Loss to donor = £600,000 − £280,000 = £320,000.
The value of the 20% given is not used. The loss is measured on the estate.

Answer: The transfer of value is £320,000.

Example 2

Bina makes a lifetime transfer of £405,000 to a discretionary trust and Bina pays the IHT. Her annual exemptions for the current and previous year (£3,000 each, £6,000 in total) are available. She has made no earlier chargeable transfers. Compute the lifetime tax and the gross chargeable transfer.

Show the solution

Net transfer after exemptions: £405,000 − £6,000 = £399,000.
Available nil rate band: £325,000.
Excess over nil rate band: £399,000 − £325,000 = £74,000.
Gross up the excess: £74,000 ÷ 0.8 = £92,500.
Gross chargeable transfer = £325,000 + £92,500 = £417,500.
Tax = £92,500 × 20% = £18,500.
Check: £417,500 − £18,500 = £399,000, which matches the net transfer.

Answer: Lifetime tax is £18,500 and the gross chargeable transfer is £417,500.

Exam tips

Read who pays the tax first. It decides whether you gross up.
When shares are in the question, write the before and after values on separate lines so you earn method marks even if a figure is wrong.
Scan the facts for a spouse or civil partner who also holds shares. That is the signal for related property.
Use the nil rate band and 20% lifetime rate from the tax tables. Do not rely on memory for figures.
Show the check: gross transfer less tax should equal the net transfer.

Practice questions from Inheritance tax: the scope of inheritance tax

Related Property and Valuation of Transfers in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Related Property and Valuation of Transfers: frequently asked questions

What does loss to donor mean in IHT?

It means the transfer of value is the fall in the donor's estate caused by the gift. It is not the value received by the donee. It matters most when a gift reduces a larger holding, such as a controlling shareholding.

What is related property for IHT?

It is property owned by you and your spouse or civil partner, or certain property held by a charity or exempt body after a transfer from you or your spouse. Each holding is valued as a share of the combined value of all related property.

How do I gross up a chargeable lifetime transfer?

Subtract the available nil rate band from the net transfer. Divide the excess by 0.8. Add back the nil rate band used to get the gross transfer. The tax is 20% of the gross excess.

Do I gross up if the donee pays the IHT?

No. If the donee pays, the transfer of value is the gift itself after exemptions. Tax is 20% of the amount above the nil rate band.