The loss to the estate principle for inheritance tax

Q: When is the loss bigger than the value of the gift?

HMRC's manual gives two standard examples (IHTM04055). A share of a property. Alice owns a property worth £200,000 and gives a one half share to Jessica. A half share is usually worth less than half the whole. If the half share is valued at £90,000, the loss to Alice's estate is £200,000 less the £90,000 half she keeps, which is £110,000, more than the £90,000 value of the share given. The joint property discount works in the donor's favour on death but against them here. Losing control of a company. Bernard owns 60 of the 100 issued shares in ABC Ltd, so he has control. He gives 20 shares to Frank. The gift takes him from a controlling 60 per cent holding to a minority 40 per cent holding, so the loss to his estate is much greater than the value of 20 shares on their own. The loss is also bigger than the gift where the donor pays the tax on an immediately chargeable transfer. The tax itself leaves the estate, so the gift has to be grossed up (IHTM14593). Grossing up does not apply to a failed potentially exempt transfer unless the donor was obliged to pay the tax. See grossing up lifetime gifts.

Inheritance Tax measures a lifetime gift by how much poorer it makes the giver, not by how much the recipient receives. Section 3(1) of the Inheritance Tax Act 1984 defines the value transferred as the drop in the value of the giver’s estate caused by the disposition. Usually the two figures are the same, but where a gift breaks up a controlling shareholding or a whole property, the loss to the estate can be far larger than the value of the thing given.

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What does the loss to the estate principle actually say?

Section 3(1) of the Inheritance Tax Act 1984 (IHTA 1984) says a transfer of value is a disposition made by a person as a result of which the value of their estate immediately after the disposition is less than it would be but for the disposition, and the amount by which it is less is the value transferred. HMRC calls this the loss to the transferor’s estate (IHTM04054).

Two valuations are therefore needed: the estate before the gift and the estate after it. Each asset is valued at open market value under section 160, the price it might reasonably be expected to fetch if sold in the open market at that time. The value transferred is the difference, not the market value of the asset handed over.

HMRC’s guidance says the loss is often the same as the value of the property given, but in some situations it can be more (IHTM04055) or less (IHTM04056). Those are the cases where the principle changes the tax.

Why does the law look at the giver rather than the recipient?

Inheritance Tax is a tax on the transfer of wealth out of an estate. The estate is the whole of the property to which a person is beneficially entitled (section 5(1), IHTM04029), and HMRC describes the estate concept as one of the most important features of the tax because different parts of the same property must be brought together for valuation (IHTM09701).

If the tax looked only at what each recipient received, a person could break up a valuable whole into pieces that are each worth less on their own and pass them out one at a time. Measuring the fall in the donor’s estate captures the value that is lost by the break up as well as the value of the pieces.

This is a real difference from Capital Gains Tax. For CGT, section 17 of the Taxation of Chargeable Gains Act 1992 treats a gift as a disposal at the market value of the asset itself, so a gift of 20 shares is valued as 20 shares. The market value rule for CGT and the Inheritance Tax value of the same gift can be very different numbers.

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When is the loss bigger than the value of the gift?

HMRC’s manual gives two standard examples (IHTM04055).

A share of a property. Alice owns a property worth £200,000 and gives a one half share to Jessica. A half share is usually worth less than half the whole. If the half share is valued at £90,000, the loss to Alice’s estate is £200,000 less the £90,000 half she keeps, which is £110,000, more than the £90,000 value of the share given. The joint property discount works in the donor’s favour on death but against them here.
Losing control of a company. Bernard owns 60 of the 100 issued shares in ABC Ltd, so he has control. He gives 20 shares to Frank. The gift takes him from a controlling 60 per cent holding to a minority 40 per cent holding, so the loss to his estate is much greater than the value of 20 shares on their own.

The loss is also bigger than the gift where the donor pays the tax on an immediately chargeable transfer. The tax itself leaves the estate, so the gift has to be grossed up (IHTM14593). Grossing up does not apply to a failed potentially exempt transfer unless the donor was obliged to pay the tax. See grossing up lifetime gifts.

Can the loss be smaller than the value of the gift?

Yes, in three situations HMRC identifies (IHTM04056):

the property given remains part of the donor’s estate for Inheritance Tax, for example where it went into a qualifying interest in possession trust for the donor before 22 March 2006;
the property given is excluded property, which section 3(2) says is ignored when it leaves the estate; HMRC’s example is a reversionary interest given away, which is not a transfer of value at all;
the recipient pays the donor’s expenses of making the transfer, other than the Inheritance Tax, which section 164 takes into account.

How do related property and a spouse’s holding fit in?

The before and after valuations include related property. Under section 161, property in the estate of a spouse or civil partner (and certain property given to charities and similar bodies) is valued together with the donor’s own property where that produces a higher value (IHTM09731). So a husband who owns 30 per cent of a company whose other 30 per cent belongs to his wife is treated as having a share of a 60 per cent controlling block. A gift that breaks the combined control can produce a large loss to his estate even though his own holding was never a majority. The related property rules and valuing unquoted shares pages cover the apportionment.

What about a sale at an undervalue?

A sale is still a disposition. If the price is less than market value, the estate falls by the difference between the value of what leaves and the cash that comes in. Section 10 takes a disposition out of charge if it was not intended to confer any gratuitous benefit and was made at arm’s length between unconnected persons, or was such as might be expected in such a transaction. For unquoted shares or debentures, section 10(2) also requires the price to have been freely negotiated, or such as might have been freely negotiated, at the time. A genuine bad bargain is therefore not a gift, but a cheap sale to a relative usually is.

The definition of disposition is wide. Section 3(3) treats a deliberate omission to exercise a right as a disposition where it reduces your estate and increases someone else’s (IHTM04023). Letting a valuable option lapse in favour of a child can be a transfer of value even though nothing was handed over.

What does a share gift look like in numbers?

Illustration only. Rhian owns 60 of the 100 shares in a trading company. A valuer advises that a 60 per cent controlling holding is worth £540,000, a 40 per cent minority holding is worth £200,000 and a 20 per cent holding on its own is worth £80,000. Rhian gives 20 shares to her son.

Step	Value
Estate before: 60 shares	£540,000
Estate after: 40 shares	£200,000
Loss to the estate (value transferred)	£340,000
Value of the 20 shares the son receives	£80,000

For Inheritance Tax the value transferred is £340,000, before any exemptions or business relief. For CGT on the same gift the disposal is of 20 shares at their own market value. Reliefs such as business relief then apply to the value transferred, not to the recipient’s figure.

What happens if the donor dies within seven years?

A gift to an individual is normally a potentially exempt transfer, chargeable only if the donor dies within seven years (IHTM04051). If that happens, it is the value transferred at the date of the gift, the loss to the estate, that is cumulated and taxed (IHTM14513). The value is fixed then; later growth in the recipient’s hands is not taxed as part of the gift. If the asset has fallen in value by the date of death, fall in value relief under section 131 may reduce the charge. See also the seven year rule.

Some charges are deemed transfers rather than real dispositions. HMRC notes that for deemed transfers, such as property ceasing to be subject to a reservation, the value transferred may not be established by reference to the loss to the transferor’s estate (IHTM04025).

Which mistakes come up most often?

Valuing only the asset given. Records of a share gift should include valuations of the holding before and after, not just the block transferred.
Forgetting a spouse’s shares or half of a jointly owned property, which can turn a minority gift into the break up of a controlling block under the related property rules.
Assuming the CGT market value figure works for Inheritance Tax. The two taxes ask different questions.
Treating a sale to family at a discount as outside Inheritance Tax. Unless section 10 is met, the shortfall is a transfer of value.
Ignoring the cost of tax paid by the donor on a chargeable lifetime transfer, which increases the loss and needs grossing up.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.