Capital Transfer Tax Act 1984

PART II Exempt Transfers

CHAPTER I General

18 Transfers between spouses

(1) A transfer of value is an exempt transfer to the extent that the value transferred is attributable to property which becomes comprised in the estate of the transferor's spouse or, so far as the value transferred is not so attributable, to the extent that that estate is increased.

(2) If, immediately before the transfer, the transferor but not the transferor's spouse is domiciled in the United Kingdom the value in respect of which the transfer is exempt (calculated as a value on which no tax is chargeable) shall not exceed £55,000 less any amount previously taken into account for the purposes of the exemption conferred by this section.

(3) Subsection (1) above shall not apply in relation to property if the testamentary or other disposition by which it is given—

(a) takes effect on the termination after the transfer of value of any interest or period, or

(b) depends on a condition which is not satisfied within twelve months after the transfer;

but paragraph (a) above shall not have effect by reason only that the property is given to a spouse only if he survives the other spouse for a specified period.

(4) For the purposes of this section, property is given to a person if it becomes his property or is held on trust for him.

19 Annual exemption

(1) Transfers of value made by a transferor in any one year are exempt to the extent that the values transferred by them (calculated as values on which no tax is chargeable) do not exceed £3,000.

(2) Where those values fall short of £3,000, the amount by which they fall short shall, in relation to the next following year, be added to the £3,000 mentioned in subsection (1) above.

(3) Where those values exceed £3,000, the excess—

(a) shall, as between transfers made on different days, be attributed so far as possible to a later rather than an earlier transfer, and

(b) shall, as between transfers made on the same day, be attributed to them in proportion to the values transferred by them.

(4) In this section " year " means period of twelve months ending with 5th April.

(5) Section 3(4) above shall not apply for the purposes of this section (but without prejudice to sections 57 and 94(5) below).

20 Small gifts

(1) Transfers of value made by a transferor in, any one year by outright gifts to any one person are exempt if the values transferred by them (calculated as Values on which no tax is chargeable) do not exceed £250.

(2) In this section " year " means period of twelve months ending with 5th April.

(3) Section 3(4) above shall not apply for the purposes of this section.

21 Normal expenditure out of income

(1) A transfer of value is an exempt transfer if, or to the extent that, it is shown—

(a) that it was made as part of the normal expenditure of the transferor, and

(b) that (taking one year with another) it was made out of his income, and

(c) that, after allowing for all transfers of value forming part of his normal expenditure, the transferor was left with sufficient income to maintain his usual standard of living.

(2) A payment of a premium on a policy of insurance on the transferor's life, or a gift of money or money's worth applied, directly or indirectly, in payment of such a premium, shall not for the purposes of this section be regarded as part of his normal expenditure if, when the insurance was made or at any earlier or later time, an annuity was purchased on his life, unless it is shown that—

(a) the purchase of the annuity, and

(b) the making or any variation of the insurance or of any prior insurance for which the first-mentioned insurance was directly or indirectly substituted,

were not associated operations.

(3) So much of a purchased life annuity (within the meaning of section 230 of the Taxes Act) as is, for the purposes of the provisions of the Tax Acts relating to income tax on annuities and other annual payments, treated as the capital element contained in the annuity, shall not be regarded as part of the transferor's income for the purposes of this section.

(4) Subsection (3) above shall not apply to annuities purchased before 13th November 1974.

(5) Section 3(4) above shall not apply for the purposes of this section.

22 Gifts in consideration of marriage

(1) Transfers of value made by gifts in consideration of marriage are exempt to the extent that the values transferred by such transfers made by any one transferor in respect of any one marriage (calculated as values on which no tax is chargeable) do not exceed—

(a) in the case of gifts within subsection (2) below by a parent of a party to the marriage, £5,000,

(b) in the case of other gifts within subsection (2) below, £2,500, and

(c) in any other case £1,000 ;

any excess being attributed to the transfers in proportion to the values transferred.

(2) A gift is within this subsection if—

(a) it is an outright gift to a child or remoter descendant of the transferor or

(b) the transferor is a parent or remoter ancestor of either comprised in the gift is settled by the gift, or

(c) the transferor is a party to the marriage, and either the gift is an outright gift to the other party to the marriage or the property comprised in the gift is settled by the gift;

and in this section " child " includes an illegitimate child, an adopted child and a step-child and " parent", " descendant" and " ancestor " shall be construed accordingly.

(3) A disposition which is an outright gift shall not be treated for the purposes of this section as a gift made in consideration of marriage if, or in so far as, it is a gift to a person other than a party to the marriage.

(4) A disposition which is not an outright gift shall not be treated for the purposes of this section as a gift made in consideration of marriage if the persons who are or may become entitled to any benefit under the disposition include any person other than—

(a) the parties to the marriage, issue of the marriage, or a wife or husband of any such issue ;

(b) persons becoming entitled on the failure of trusts for any such issue under which trust property would (subject only to any power of appointment to a person falling within paragraph (d) or (c) of this subsection) vest indefeasibly on the attainment of a specified age or either on the attainment of such an age or on some earlier event, or persons becoming entitled (subject as aforesaid) on the failure of any limitation in tail;

(c) a subsequent wife or husband of a party to the marriage, or any issue, or the wife or husband of any issue, of a subsequent marriage of either party;

(d) persons becoming entitled under such trusts, subsisting under the law of England and Wales or of Northern Ireland, as are specified in section 33(1) of the [1925 c. 19.] Trustee Act 1925 or section 34(1) of the [1958 c. 23 (N.I.).] Trustee Act (Northern Ireland) 1958 (protective trusts), the principal beneficiary being a person falling within paragraph (a) or (c) of this subsection, or under such trusts, modified by the enlargement, as respects any period during which there is no such issue as aforesaid in existence, of the class of potential beneficiaries specified in paragraph (ii) of the said section 33(1) or paragraph (b) of the said section 34(1);

(e) persons becoming entitled under trusts subsisting under the law of Scotland and corresponding with such trusts as are mentioned in paragraph (d) above;

(f) as respects a reasonable amount of remuneration, the trustees of the settlement.

(5) References in subsection (4) above to issue shall apply as if any person legitimated by a marriage, or adopted by the husband and wife jointly, were included among the issue of that marriage.

(6) Section 3(4) above shall not apply for the purposes of this section (but without prejudice to section 57 below).

23 Gifts to charities

(1) Transfers of value are exempt to the extent that the values transferred by them are attributable to property which is given to charities.

(2) Subsection (1) above shall not apply in relation to property if the testamentary or other disposition by which it is given—

(a) takes effect on the termination after the transfer of value of any interest or period, or

(b) depends on a condition which is not satisfied within twelve months after the transfer, or

(c) is defeasible;

and for this purpose any disposition which has not been defeated at a time twelve months after the transfer of value and is not defeasible after that time shall be treated as not being defeasible (whether or not it was capable of being defeated before that time).

(3) Subsection (1) above shall not apply in relation to property which is an interest in other property if—

(a) that interest is less than the donor's, or

(b) the property is given for a limited period;

and for this purpose any question whether an interest is less than the donor's shall be decided as at a time twelve months after the transfer of value.

(4) Subsection (1) above shall not apply in relation to any property if—

(a) the property is land or a building and is given subject to an interest reserved or created by the donor which entitles him, his spouse or a person connected with him to possession of, or to occupy, the whole or any part of the land or building rent-free or at a rent less than might be expected to be obtained in a transaction at arm's length between persons not connected with each other, or

(b) the property is not land or a building and is given subject to an interest reserved or created by the donor other than—

(i) an interest created by him for full consideration in money or money's worth, or

(ii) an interest which does not substantially affect the enjoyment of the property by the person or body to whom it is given ;

and for this purpose any question whether property is given subject to an interest shall be decided as at a time twelve months after the transfer of value.

(5) Subsection (1) above shall not apply in relation to property if it or any part of it may become applicable for purposes other than charitable purposes or those of a body mentioned in section 24, 25 or 26 below.

(6) For the purposes of this section property is given to charities if it becomes the property of charities or is held on trust for charitable purposes only, and " donor" shall be construed accordingly.

24 Gifts to political parties

(1) Transfers of value are exempt to the extent that the values transferred by them—

(a) are attributable to property which becomes the property of a political party qualifying for exemption under this section, and

(b) so far as made on or within one year of the death of the transferor, do not exceed £100,000.

(2) A political party qualifies for exemption under this section if, at the last general election preceding the transfer of value,—

(a) two members of that party were elected to the House of Commons, or

(b) one member of that party was elected to the House of Commons and not less than 150,000 votes were given to candidates who were members of that party.

(3) Subsections (2) to (5) of section 23 above shall apply in relation to subsection (1) above as they apply in relation to section 23(1).

(4) For the purposes of section 23(2) to (5) as they apply by virtue of subsection (3) above property is given to any person or body if it becomes the property of or is held on trust for that person or body, and " donor " shall be construed accordingly.

25 Gifts for national purposes, etc.

(1) A transfer of value is an exempt transfer to the extent that the value transferred by it is attributable to property which becomes the property of a body within Schedule 3 to this Act.

(2) Subsections (2) to (5) of section 23 and subsection (4) of section 24 above shall apply in relation to subsection (1) above as they apply in relation to section 24(1), except that section 23(3) shall not prevent subsection (1) above from applying in relation to property consisting of the benefit of an agreement restricting the use of land.

26 Gifts for public benefit

(1) A transfer of value is an exempt transfer to the extent that—

(a) the value transferred by it is attributable to property within subsection (2) below which becomes the property of a body not established or conducted for profit, and

(b) the Treasury so direct (whether before or after the time of the transfer).

(2) Property is within this subsection if it is—

(a) land which in the opinion of the Treasury is of outstanding scenic or historic or scientific interest;

(b) a building for the preservation of which special steps should in the opinion of the Treasury be taken by reason of its outstanding historic or architectural or aesthetic interest and the cost of preserving it;

(c) land used as the grounds of a building within paragraph (b) above;

(d) an object which at the time of the transfer is ordinarily kept in, and which is given with, a building within paragraph (b) above;

(e) property given as a source of income for the upkeep of property within any of the paragraphs of this subsection ;

(f) a picture, print, book, manuscript, work of art or scientific collection which in the opinion of the Treasury is of national, scientific, historic or artistic interest.

(3) The Treasury shall not give a direction under this section—

(a) in relation to land within subsection (2)(a) above, unless in their opinion the body whose property it becomes is an appropriate one to be responsible for the preservation of its character;

(b) in relation to property within subsection (2)(b) or (f) above, unless in their opinion the body whose property it becomes is an appropriate one to be responsible for its preservation;

(c) in relation to property within subsection (2)(e) above, if or to the extent that, in the opinion of the Treasury, the property will produce more income than is needed (with a reasonable margin) for the upkeep of the other property in question.

(4) Before giving a direction under this section in relation to any property (other than property within subsection (2)(e) above) the Treasury may require such undertakings to be entered into, including undertakings restricting the use or disposal of the property, as they think appropriate for securing the preservation of the property or its character and reasonable access to it for the public.

(5) Any undertaking entered into by virtue of subsection (4) above may be varied from time to time by agreement between the Treasury and the person bound by the undertaking, and the Treasury may require further undertakings to be entered into as a condition for agreeing to any such variation or consenting to anything for which their consent is required by any undertaking.

(6) The obligations imposed by any undertaking entered into by virtue of this section shall be enforceable for the public benefit by injunction (or, in Scotland, by interdict or by petition under section 91 of the [1868 c. 100.] Court of Session Act 1868), and any purported disposition of property in contravention of an undertaking shall be void, as if the obligation had been imposed by Act of Parliament.

(7) Subsections (2) to (5) of section 23 and subsection (4) of section 24 above shall apply in relation to subsection (1) above as they apply in relation to section 24(1).

(8) Property is given with other property for the purposes of this section if the value transferred by a transfer of value is attributable to both and both become the property of the same body.

(9) In this section "national interest" includes interest within any part of the United Kingdom.

27 Maintenance funds for historic buildings, etc.

(1) A transfer of value is an exempt transfer to the extent that the value transferred by it is attributable to property which by virtue of the transfer becomes comprised in a settlement and in respect of which—

(a) a direction under paragraph 1 of Schedule 4 to this Act has effect at the time of the transfer, or

(b) such a direction is given after the time of the transfer.

(2) Subsections (2) and (3) of section 23 and subsection (4) of section 24 above shall apply in relation to subsection (1) above as they apply in relation to section 24(1).

28 Employee trusts

(1) A transfer of value made by an individual who is beneficially entitled to shares in a company is an exempt transfer to the extent that the value transferred is attributable to shares in or securities of the company which become comprised in a settlement if—

(a) the trusts of the settlement are of the description specified in section 86(1) below, and

(b) the persons for whose benefit the trusts permit the settled property to be applied include all or most of the persons employed by or holding office with the company.

(2) Subsection (1) above shall not apply unless at the date of the transfer, or at a subsequent date not more than one year thereafter, both the following conditions are satisfied, that is to say—

(a) the trustees—

(i) hold more than one half of the ordinary shares in the company, and

(ii) have powers of voting on all questions affecting the company as a whole which if exercised would yield a majority of the votes capable of being exercised on them ; and

(b) there are no provisions in any agreement or instrument affecting the company's constitution or management or its shares or securities whereby the condition in paragraph (a) above can cease to be satisfied without the consent of the trustees.

(3) Where the company has shares or securities of any class giving powers of voting limited to either or both of the following—

(a) the question of winding up the company, and

(b) any question primarily affecting shares or securities of that class,

the reference in subsection (2)(a)(ii) above to all questions affecting the company as a whole shall be read as a reference to all such questions except any in relation to which those powers are capable of being exercised.

(4) Subsection (1) above shall not apply if the trusts permit any of the settled property to be applied at any time (whether during any such period as is referred to in section 86(1) below or later) for the benefit of—

(a) a person who is a participator in the company mentioned in subsection (1) above ; or

(b) any other person who is a participator in any close company that has made a disposition whereby property became comprised in the same settlement, being a disposition which but for section 13 above would have been a transfer of value ; or

(c) any other person who has been a participator in the company mentioned in subsection (1) above or in any such company as is mentioned in paragraph (b) above at any time after, or during the ten years before, the transfer of value mentioned in subsection (1) above; or "

(d) any person who is connected with any person within paragraph (a), (b) or (c) above.

(5) The participators in a company who are referred to in subsection (4) above do not include any participator who—

(a) is not beneficially entitled to, or to rights entitling him to acquire, 5 per cent. or more of, or of any class of the shares comprised in, its issued share capital, and

(b) on a winding-up of the company would not be entitled to 5 per cent. or more of its assets.

(6) In determining whether the trusts permit property to be applied as mentioned in subsection (4) above, no account shall be taken of any power to make a payment which is the income of any person for any of the purposes of income tax, or would be the income for any of those purposes of a person not resident in the United Kingdom if he were so resident.

(7) Subsection (5) of section 13 above shall have effect in relation to this section as it has effect in relation to that section.

29 Loans-modifications of exemptions

(1) If or to the extent that a transfer of value is a disposition whereby the use of money or other property is allowed by one person to another (" the borrower "), the preceding provisions of this Chapter shall apply to it with the following modifications.

(2) For the purposes of section 18 the borrower's estate shall be treated as increased by an amount equal to the value transferred ; and section 18(3) shall not apply.

(3) For the purposes of sections 20 and 22 the transfer of value shall be treated as made by outright gift.

(4) Section 21(1) shall apply as if for the conditions stated in paragraphs (a) and (b) there were substituted the condition that the transfer was a normal one on the part of the transferor.

(5) For the purposes of sections 23 to 26—

(a) the value transferred shall be treated as attributable to the property of which the borrower is allowed the use, and

(b) that property shall be treated as given to, or as becoming the property of, the borrower unless the use allowed includes use for purposes other than charitable purposes or those of a body mentioned in section 24, 25 or 26 ;

and sections 23(2) to (6), 24(1)(W. (3) and (4), 25(2) and 26(7) shall not apply.

CHAPTER II Conditional Exemption

30 Conditionally exempt transfers

(1) A transfer of value is an exempt transfer to the extent that the value transferred by it is attributable to property—

(a) which, on a claim made for the purpose, is designated by the Treasury under section 31 below, and

(b) with respect to which the requisite undertaking described in that section is given by such person as the Treasury think appropriate in the circumstances of the case.

(2) A transfer of value exempt with respect to any property under this section or under section 76 of the [1976 c. 40.] Finance Act 1976 is referred to in this Act as a conditionally exempt transfer of that property.

(3) Subsection (1) above shall not apply to a transfer of value other than one which under section 4 above a person makes on his death unless—

(a) the transferor or his spouse, or the transferor and his spouse between them, have been beneficially entitled to the property throughout the six years ending with the transfer, or

(b) the transferor acquired the property on a death on the occasion of which there was a transfer of value under section 4 above which was itself a conditionally exempt transfer of the property.

(4) Subsection (1) above does not apply to a transfer of value to the extent to which it is an exempt transfer under section 18 or 23 above.

31 Designation and undertakings

(1) The Treasury may designate under this section—

(a) any pictures, prints, books, manuscripts, works of art, scientific collections or other things not yielding income which appear to the Treasury to be of national, scientific, historic or artistic interest;

(b) any land which in the opinion of the Treasury is of outstanding scenic or historic or scientific interest;

(c) any building for the preservation of which special steps should in the opinion of the Treasury be taken by reason of its outstanding historic or architectural interest;

(d) any land which adjoins such a building as is mentioned in paragraph (c) above and which in the opinion of the Treasury is essential for the protection of the character and amenities of the building;

(e) any object which in the opinion of the Treasury is historically associated with such a building as is mentioned in paragraph (c) above.

(2) In the case of property within subsection (1)(a) above, the requisite undertaking is that, until the person beneficially entitled to the property dies or the property is disposed of, whether by sale or gift or otherwise—

(a) the property will be kept permanently in the United Kingdom and will not leave it temporarily except for a purpose and a period approved by the Treasury, and

(b) reasonable steps will be taken for the preservation of the property and for securing reasonable access to the public.

(3) If it appears to the Treasury, on a claim made for the purpose, that any documents which are designated or to be designated under subsection (1)(a) above contain information which for personal or other reasons ought to be treated as confidential, they may exclude those documents, either altogether or to such extent as they think fit, from so much of an undertaking given or to be given under subsection (2)(b) above as relates to public access.

(4) In the case of other property within subsection (1) above, the requisite undertaking is that, until the person beneficially ; entitled to the property dies or the property is disposed of, whether by sale or gift or otherwise, reasonable steps will be taken—

(a) in the case of land falling within subsection (1)(b) above, for the maintenance of the land and the preservation of its character, and

(b) in the case of any other property, for the maintenance, repair and preservation of the property and, if it is an object falling within subsection (1)(e) above, for keeping it associated with the building concerned;

and for securing reasonable access to the public.

(5) In this section " national interest" includes interest within any part of the United Kingdom.

32 Chargeable events

(1) Where there has been a conditionally exempt transfer of any property, tax shall be charged under this section on the first occurrence after the transfer of an event which under this section is a chargeable event with respect to the property.

(2) If the Treasury are satisfied that at any time an undertaking given with respect to the property under section 30 above or subsection (5)(b) below has not been observed in a material respect, the failure to observe the undertaking is a chargeable event with respect to the property.

(3) If—

(a) the person beneficially entitled to the property dies, or

(b) the property is disposed of, whether by sale or gift or otherwise,

the death or disposal is, subject to subsections (4) and (5) below, a chargeable event with respect to the property.

(4) A death or disposal is not a chargeable event with respect to any property if the personal representatives of the deceased (or, in the case of settled property, the trustees or the person next entitled) within three years of the death make or, as the case may be, the disposal is—

(a) a disposal of the property by sale by private treaty to a body mentioned in Schedule 3 to this Act, or a disposal of it to such a body otherwise than by sale, or

(b) a disposal in pursuance of section 230 below. and a death or disposal of the property after such a disposal as is mentioned in paragraph (a) or (b) above is not a chargeable event with respect to the property unless there has again been a conditionally exempt transfer of it after that disposal.

(5) A death or disposal otherwise than by sale is not a chargeable event with respect to any property if—

(a) the transfer of value made on the death or the disposal is itself a conditionally exempt transfer of the property, or

(b) the undertaking previously given with respect to the property under section 30 above (or any undertaking previously given with respect to the property under this paragraph) is replaced by a corresponding undertaking given by such person as the Treasury think appropriate in the circumstances of the case.

(6) Where tax is chargeable under this section with respect to any property within section 31(1)(c), (d) or (e) above, tax shall also be chargeable with respect to any property associated with it; but the Treasury may direct that the foregoing provisions of this subsection shall not apply if it appears to them that the entity consisting of the building, land and objects concerned has not been materially affected.

(7) For the purposes of subsection (6) above two or more properties are associated with each other if one of them is a building falling within subsection (1)(c) of section 31 above and the other or others such land or objects as, in relation to that building, fall within subsection (1)(d) or (e) of that section.

33 Amount of charge under section 32

(1) Tax chargeable in respect of any property under section 32 above by reference to a chargeable event shall be charged—

(a) on an amount equal to the value of the property at the time of the chargeable event; and

(b) at the following rate or rates—

(i) if the relevant person is alive, the rate or rates that would be applicable to that amount under the second Table in Schedule 1 to this Act if it were the value transferred by a chargeable transfer made by the relevant person at that time;

(ii) if the relevant person is dead, the rate or rates that would have applied to that amount under the appropriate Table if it had been added to the value transferred on his death and had formed the highest part of that value.

(2) For the purposes of subsection (1)(b)(ii) above the appropriate Table is, if the conditionally exempt transfer by the relevant person was made on death, the first Table in Schedule 1 to this Act and, if not, the second Table.

(3) Where the chargeable event is a disposal on sale and the sale—

(a) was not intended to confer any gratuitous benefit on any person, and

(b) was either a transaction at arm's length between persons not connected with each other or a transaction such as might be expected to be made at arm's length between persons not connected with each other,

the value of the property at the time of the chargeable event shall be taken for the purposes of subsection (1)(a) above to be equal to the proceeds of the sale.

(4) Where by virtue of section 30(4) above the conditionally exempt transfer extended only to part of the property, the amount mentioned in subsection (1)(a) above shall be proportionately reduced.

(5) The relevant person in relation to a chargeable event in respect of any property is—

(a) if there has been only one conditionally exempt transfer of the property before the event, the person who made that transfer;

(b) if there have been two or more such transfers and the last was before, or only one of them was within, the period of thirty years ending with the event, the person who made the last of those transfers ;

(c) if there have been two or more such transfers within that period, the person who made whichever of those transfers the Board may select.

(6) The conditionally exempt transfers to be taken into account for the purpose of subsection (5) above in relation to a chargeable event do not include transfers made before any previous chargeable event in respect of the same property or before any event which apart from section 32(4) above would have been such a chargeable event.

(7) Where after a conditionally exempt transfer of any property there is a chargeable transfer the value transferred by which is wholly or partly attributable to that property, any tax charged on that value so far as attributable to that property shall be allowed as a credit—

(a) if the chargeable transfer is a chargeable event with respect to the property, against the tax chargeable in accordance with this section by reference to that event;

(b) if the chargeable transfer is not such a chargeable event, against the tax chargeable in accordance with this section by reference to the next chargeable event with respect to the property.

34 Reinstatement of transferor's cumulative total

(1) Where tax has become chargeable under section 32 above by reference to a chargeable event in respect of any property (" the relevant event") the rate or rates of tax applicable to any subsequent chargeable transfer made by the person who made the last conditionally exempt transfer of the property before the relevant event shall be determined as if the amount on which tax has become chargeable as aforesaid were value transferred by a chargeable transfer made by him at the time of the relevant event.

(2) Where the person who made the last conditionally exempt transfer of the property before the relevant event—

(a) is dead, and

(b) is for the purposes of section 33 above the relevant person in relation to a subsequent chargeable event,

section 33(1)(b)(ii) shall have effect as if the value transferred on his death were increased by the amount on which tax has become chargeable on the occasion of the relevant event.

(3) If—

(a) the person who made the last conditionally exempt transfer of the property before the relevant event is not the relevant person for the purposes of section 33 above in relation to that event, and

(b) at the time of that event or within the previous five years the property is or has been comprised in a settlement made not more than thirty years before that event, and

(c) a person who is the settlor in relation to the settlement has made a conditionally exempt transfer of the property within those thirty years,

subsections (1) and (2) above shall have effect with the substitution for references to the person who made the last conditionally exempt transfer before the relevant event of a reference to any such person as is mentioned in paragraph (c) above.

(4) The conditionally exempt transfers to be taken into account for the purposes of subsection (3)(c) above in relation to the relevant event do not include transfers made before any previous chargeable event in respect of the same property or before any event which apart from section 32(4) above would have been such a chargeable event.

35 Conditional exemption on death before 7th April 1976

(1) Schedule 5 to this Act shall have effect with respect to certain cases where, by virtue of sections 31 to 34 of the [1975 c. 7.] Finance Act 1975, the value of any property was left out of account in determining the value transferred on a death before 7th April 1976.

(2) Where there has been a transfer of value in relation to which the value of any property has been left out of account under the provisions of sections 31 to 34 of the Finance Act 1975 and, before any tax has become chargeable in respect of that property under those provisions, there is a conditionally exempt transfer of that property, then, on the occurrence of a chargeable event in respect of that property—

(a) if there has been no conditionally exempt transfer of the property on death, tax shall be chargeable either under section 32 above or under Schedule 5 to this Act as the Board may elect;

(b) if there has been such a conditionally exempt transfer, tax shall be chargeable under that section and not under that Schedule.

(3) In section 33(7) above, the reference to a conditionally exempt transfer of any property includes a reference to a transfer of value in relation to which the value of any property has been left out of account under the provisions of sections 31 to 34 of the Finance Act 1975 and, in relation to such property, references to a chargeable event or to the tax chargeable in accordance with section 33 above by reference to a chargeable event include references to an event on the occurrence of which tax becomes chargeable under Schedule 5 to this Act, or to the tax so chargeable.

CHAPTER III Allocation of Exemptions

36 Preliminary

Where any one or more of sections 18, 23 to 27 and 30 above apply in relation to a transfer of value but the transfer is not wholly exempt—

(a) any question as to the extent to which it is exempt or, where it is exempt up to a limit, how an excess over the limit is to be attributed to the gifts concerned shall be determined in accordance with sections 37 to 40 below; and

(b) section 41 below shall have effect as respects the burden of tax.

37 Abatement of gifts

(1) Where a gift would be abated owing to an insufficiency of assets and without regard to any tax chargeable, the gift shall be treated for the purposes of the following provisions of this Chapter as so abated.

(2) Where the value attributable, in accordance with section 38 below, to specific gifts exceeds the value transferred the gifts shall be treated as reduced to the extent necessary to reduce their value to that of the value transferred; and the reduction shall be made in the order in which, under the terms of the relevant disposition or any rule of law, it would fall to be made on a distribution of assets.

38 Attribution of value to specific gifts

(1) Such part of the value transferred shall be attributable to specific gifts as corresponds to the value of the gifts; but if or to the extent that the gifts—

(a) are not gifts with respect to which the transfer is exempt or are outside the limit up to which the transfer is exempt, and

(b) do not bear their own tax,

the amount corresponding to the value of the gifts shall be taken to be the amount arrived at in accordance with subsections (3) to (5) below.

(2) Where any question arises as to which of two or more specific gifts are outside the limit up to which a transfer is exempt or as to the extent to which a specific gift is outside that limit—

(a) the excess shall be attributed to gifts not bearing their own tax before being attributed to gifts bearing their own tax, and

(b) subject to paragraph (a) above, the excess shall be attributed to gifts in proportion to their values.

(3) Where the only gifts with respect to which the transfer is or might be chargeable are specific gifts which do not bear their own tax, the amount referred to in subsection (1) above is the aggregate of—

(a) the sum of the value of those gifts ; and

(b) the amount of tax which would be chargeable if the value transferred equalled that aggregate.

(4) Where the specific gifts not bearing their own tax are not the only gifts with respect to which the transfer is or might be chargeable, the amount referred to in subsection (1) above is such amount as, after deduction of tax at the assumed rate specified in subsection (5) below, would be equal to the sum of the value of those gifts.

(5) For the purposes of subsection (4) above—

(a) the assumed rate is the rate found by dividing the as sumed amount of tax by that part of the value transferred with respect to which the transfer would be chargeable on the hypothesis that—

(i) the amount corresponding to the value of specific gifts not bearing their own tax is equal to the aggregate referred to in subsection (3) above, and

(ii) the parts of the value transferred attributable to specific gifts and to gifts of residue or shares in residue are determined accordingly; and

(b) the assumed amount of tax is the amount that would be charged on the value transferred on the hypothesis mentioned in paragraph (a) above.

(6) For the purposes of this section, any liability of the transferor which is not to be taken into account under section 5(5) above shall be treated as a specific gift.

39 Attribution of value to residuary gifts

Such part only of the value transferred shall be attributed to gifts of residue or shares in residue as is not attributed under section 38 above to specific gifts.

40 Gifts made separately out of different funds

Where gifts taking effect on a transfer of value take effect separately out of different funds the preceding provisions of this Chapter shall be applied separately to the gifts taking effect out of each of those funds, with the necessary adjustments of the values and amounts referred to in those provisions.

41 Burden of tax

Notwithstanding the terms of any disposition—

(a) none of the tax on the value transferred shall fall on any specific gift if or to the extent that the transfer is exempt with respect to the gift, and

(b) none of the tax attributable to the value of the property comprised in residue shall fall on any gift of a share of residue if or to the extent that the transfer is exempt with respect to the gift.

42 Supplementary

(1) In this Chapter—

• "gift", in relation to any transfer of value, means the benefit of any disposition or rule of law by which, on the making of the transfer, any property becomes (or would but for any abatement become) the property of any person or applicable for any purpose;

• " given " shall be construed accordingly ;

• " specific gift" means any gift other than a gift of residue or of a share in residue.

(2) For the purposes of this Chapter a gift bears its own tax if the tax attributable to it falls on the person who becomes entitled to the property given or (as the case may be) is payable out of property applicable for the purposes for which the property given becomes applicable.

(3) Where—

(a) the whole or part of the value transferred by a transfer of value is attributable to property which is the subject of two or more gifts, and

(b) the aggregate of the values of the property given by each of those gifts is less than the value transferred or, as the case may be, that part of it,

then for the purposes of this Chapter (and notwithstanding the definition of a gift in subsection (1) above) the value of each gift shall be taken to be the relevant proportion of the value transferred or, as the case may be, that part of it; and the relevant proportion in relation to any gift is the proportion which the value of the property given by it bears to the said aggregate.

(4) Where on the death of a person legal rights under the law of Scotland are claimed by a person entitled to claim them, they shall be treated for the purposes of this Chapter as a specific gift which bears its own tax; and in determining the value of such legal rights, any tax payable on the estate of the deceased shall be left out of account.