Inheritance Tax Act 1984 section 138

Leases

Section 138 provides a depreciation adjustment when the transferred property is a leasehold interest with 50 years or less remaining, ensuring that the natural decline in the lease's value over time is reflected in the relief calculation under section 131.

• The section applies where the transferred property is a leasehold interest with no more than 50 years remaining at the time of the chargeable transfer.
• Because a short lease is a wasting asset, its market value at the relevant date (death or qualifying sale) must be increased by an "appropriate fraction" to reflect the depreciation that has occurred since the original transfer.
• The appropriate fraction is calculated as (P(1) − P(2)) ÷ P(1), where P(1) and P(2) are percentages taken from the table in Schedule 8 to the Taxation of Chargeable Gains Act 1992 for the lease duration at the time of the chargeable transfer and at the relevant date respectively.
• The effect of the adjustment is to add back the element of value lost purely through the passage of time, so that the relief under section 131 is not distorted by the lease's natural depreciation.