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HMRC internal manual

Inheritance Tax Manual

Legal background: introduction

The valuation of debts owed to a person is dealt with by IHTA84/S166. This provides that a debt, or rather ‘a right to receive a sum due under any obligation, is to be valued on the assumption that the obligation will be duly discharged.

There is an exception to cover cases where the recovery of the debt is impossible or not reasonably practical, and has not become so because of any act or omission by the creditor. It may be that recovery of the sum is impracticable only temporarily, for example, where money abroad is prevented from being remitted to the UK by foreign exchange control regulations. In such a case the value of the right must be discounted in a way that is appropriate to the circumstances.

If the value of a debt has been reduced or extinguished because of the creditor’s act or omission, the debt ceased to exist and does not have to be valued as part of the death estate. But the release itself may be a chargeable transfer (IHTM04027). An example of this would be where the creditor releases the debt and then dies.

In connection with the release of a debt owing at law, where the release is made voluntarily and without consideration it must be made by deed, otherwise it is void at both law and in equity.(Pinnel (1602) 5 Co Rep 117a)

In Scottish law, however, the release of a legally enforceable debt, where the release is made voluntarily and without consideration, does not need to be made by deed. It can be made by ‘informal writing’ or ‘verbally.’