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HMRC internal manual

Inheritance Tax Manual

From
HM Revenue & Customs
Updated
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Liabilities: restricted deductions: interaction with spouse or civil partner exemption where liabilities are deducted against the estate on death

Where a liability is secured on a property that passes to the spouse or civil partner, the value by which the spouse or civil partner’s estate is increased (being the net value of the property) could result in a charge arising against property that passes to the spouse or civil partner. This is because if the liability is not repaid, no deduction is allowed against the estate, but the spouse or civil partner’s estate is only increased by the net value of the property.

To be clear that spouse or civil partner exemption should continue to apply to the full value of the property that the spouse or civil partner receives, IHTA84/S175A(4) provides that where a liability is not taken into account in determining the value of a person’s estate, the liability is also not to be taken into account in determining the extent to which the spouse or civil partner’s estate is increased.

Example

James makes of loan of £25,000 to his father to help with living expenses, secured on his parent’s £500,000 house. The loan is interest-free and repayable on demand. On the father’s death, the loan is not repaid as the son is content for it to remain outstanding until his mother’s death. The property passes to his mother under his father’s Will.

An arm’s length creditor would not leave the loan outstanding so the liability cannot be taken into account by virtue of IHTA84/S175A(2)(a). The liability is disallowed as a deduction against the estate so the chargeable value of the house is £500,000 rather than £475,000. But the liability is also not taken into account when considering spouse exemption. So even though the spouse actually receives the £500,000 subject to the £25,000 liability, spouse exemption applies to the full £500,000 value of the property.