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HMRC internal manual

Inheritance Tax Manual

HM Revenue & Customs
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Rules about excepted estates: treatment of liabilities

The Finance Act 2013 introduced some rules that restrict the deduction of liabilities in certain circumstances (IHTM28010). These rules also apply, although only to a limited extent, to excepted estates under the Inheritance Tax (Delivery of Accounts) (Excepted Estates) (Amendment) Regulations SI 2014/488.

In general, the rules about excepted estates are concerned with gross values, so normally the treatment of liabilities does not have any impact. But liabilities are taken into account when determining the net chargeable value of an exempt excepted estate (IHTM06013). So the existence and treatment of liabilities can affect whether an estate can qualify as an exempt excepted estate. The new rules apply to exempt excepted estates where the death is on or after 1 April 2014.

Borrowed money used to acquire excluded property

Regulation 4(7B)(c) provides that liabilities that are attributable to the acquisition, maintenance or enhancement of:

  • excluded property, or
  • property that has become excluded property,

cannot be deducted when determining whether an estate is an exempt excepted estate, in line with IHTA84/S162 (IHTM28014). This is still the case even if the assets that were acquired maintained or enhanced are no longer excluded property and the liability would be allowed under one of the relieving provisions referred to at IHTM28010. This means that if the net chargeable value is more than the IHT nil-rate band after

  • disallowing the deduction, but
  • allowing for spouse and civil partner or charity exemption,

the personal representatives must still deliver a form IHT400 and explain why they believe that the liability may be taken into account.

Repayment of liabilities deducted against an estate

A liability may only be deducted against an estate to the extent that that is actually discharged out of the estate (IHTM28027). If the personal representatives know, when filling in form IHT205, that a particular liability will not be repaid from the estate, regulation 4(7B)(a) provides that the liability should not be deducted when arriving at the net chargeable value.

In a similar way, regulation 4(7B)(b) provides that any liability which is prevented from being taken into account under any provision of the Act should not be deducted when arriving at the net chargeable value.

However, to bring it in to line with the approach taken when completing form IHT400 (IHTM28031), the guidance for completing form IHT205 allows the personal representatives to include the debts that they expect to repay as deductions against the estate.

This means that the personal representatives must add back the amount of any liability that has been deducted but is not discharged from the estate, to the net chargeable value for the estate. If the net chargeable value is more than the IHT nil-rate band, after:

  • adding back the deduction, and
  • deducting spouse and civil partner or charity exemption,

the amendment must be reported to HMRC (IHTM06034).