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HMRC internal manual

Inheritance Tax Manual

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HM Revenue & Customs
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Valuing Businesses and Partnerships: Instalments

Inheritance Tax (IHT) on a taxable partnership interest may be paid by instalments, IHTA84/S227.  The instalments will be interest‑free, IHTA84/S234 (IHTM30363).

However, Articles of Partnership often contain a provision by which the surviving partners will purchase or will have the option to purchase the interest of a deceased partner. The instalment option ceases on sale, and the balance of tax falls due at once. If the surviving partners pay the purchase price in stages, each part-payment is treated as a part sale of the business, IHTA84/S227 (6).

Example

The Partnership Articles provide that the surviving partners are to purchase the deceased’s share in the partnership at its market value. The purchase price is to be paid in 4 annual instalments, the first to be paid 12 months after the death. The deceased dies on 6 April 2012 and the open market value of the partnership interest is agreed at £40,000. Instalment assessments will be as follows:-

31 October 2012     1st instalment due on £40,000

6 April 2013            Tax due on £10,000; instalments continue on £30,000

31 October 2013      2nd instalment due on £30,000

6 April 2014            Tax due on next £10,000;  instalments continue on £20,000

31 October 2014      3rd instalment due on £20,000

6 April 2015            Tax due on next £10,000;  instalments continue on £10,000 

31 October 2015     4th instalment due on £10,000

6 April 2016            Tax falls due on balance on £10,000

(If the Articles provide for, say, 12 annual payments to the deceased’s executors, we do not extend the 10 year period for instalments.)

If the purchase price is less than the taxable value then the instalment option will remain for the excess over the purchase price paid.