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HMRC internal manual

Inheritance Tax Manual

HM Revenue & Customs
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Liabilities: restricted deductions: repayment of liabilities deducted against the estate on death

IHTA84/S175A sets out the conditions that must be met before a liability may be deducted from the estate at death. Provided the liability is not disallowed under any other provisions of the Act, IHTA84/S175A(1)(b), a liability may only be allowed as a deduction against the estate on death to the extent that the liability is actually discharged (that is, repaid to the creditor) on or after death, out of the estate in money or money’s worth, IHTA84/S175(1)(a).

These provisions only apply to a person’s estate on death. ‘Estate’ has its normal meaning for Inheritance Tax purposes as defined in IHTA84/S5(1) (IHTM04029). But for the purposes only of establishing whether a liability has been discharged ‘out of the estate’ the normal meaning of ‘estate’ is extended.

In most estates, the liabilities owed by the deceased at death will be arm’s length, commercial liabilities and the assumption or expectation is that the liabilities will be repaid. However, debts:

  • to people related to the deceased,
  • to family trusts or companies, or
  • which are part of arrangements to mitigate tax

may not always be repaid, or repaid in full. This may result in the avoidance of related Income Tax or Capital Gains Tax charges or wealth being redistributed within the family. So, unless the liability falls within the statutory exception to this rule, (IHTM28029), a liability may only be taken into account to reduce the value of the estate on death to the extent that it is actually repaid.

The extent to which you should investigate liabilities when considering these rules is covered at IHTM28031.