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The relief works by reducing the value on which tax, or additional tax, on the lifetime transfer is charged on the death. The reduction is the amount by which the transferred asset has diminished in value (but subject to detailed rules regarding amendments to the property).

In the majority of cases, the effect of the relief is simply to reduce the value transferred to the value of the asset at the date of death or sale. Where the loss to the transferor鈥檚 estate was greater than the value of the transferred asset, separate rules (IHTM14626) apply.

The reduction in value is solely for the purpose of calculating the tax payable on a failed potentially exempt transfer (IHTM14511) or the additional tax (IHTM14571) payable on the death on an immediately chargeable transfer.

It does not affect

• the transferor鈥檚 cumulative total, which remains at its original figure for the purpose of taxing any later lifetime transfers and the transfer on death, or
• the tax originally charged at lifetime rates on an immediately chargeable lifetime transfer.

Example

Frances transfers a portfolio of quoted shares to her son David on 1 February 2010 valued at 拢100,000. On 1 February 2011 she transfers a house to her daughter Jane, valued at 拢250,000. Frances dies on 1 April 2013, when the Inheritance Tax (IHT) nil-rate band was 拢325,000.

There is no IHT due on the gift of quoted shares as the value is less than the nil-rate band. IHT of 拢10,000 is payable on the gift of the house (拢250,000 - 拢225,000 (the remaining nil-rate band after deducting the first gift of 拢100,000) = 拢25,000 脳 40%).

At the date of death the house was valued at 拢230,000 and Jane makes a claim for fall in value relief. The IHT payable is reduced by 拢8,000 (拢20,000 脳 40%) from 拢10,000 to 拢2,000.

However, the original value of the gifts of 拢350,000 is still used when calculating the tax due on Frances鈥檚 estate at the date of death.