Liabilities: restricted deductions: investigation of liabilities deducted against the estate on death
As the majority of liabilities taken as deductions against an estate will be at arm’s length, the starting assumption is that all liabilities will be repaid. So, unless the personal representatives are aware beforehand that a liability is not going to be repaid and it is not otherwise allowable as a deduction, the IHT400 Notes allow the personal representatives to include all the deceased’s liabilities when filling in the IHT400.
There is no need to make any enquiries to establish that liabilities which are clearly commercial and at arm’s length have been repaid, as it is more than likely that the creditor will want to recover the money owed to them. Examples here would be:
- utility bills,
- credit card bills,
- council tax,
- payments due to HMRC,
- outstanding care fees,
- professional fees (to the date of death),
- overpaid pension,
- payments for goods and services.
If an arm’s length liability for which a deduction is included is not actually repaid, form IHT400 would then be incorrect and the taxpayer is obliged to tell us about the adjustment to be made under IHTA84/S217.
Where, however, liabilities have been deducted which are not due to arm’s length creditors, such as family members, family trusts or companies or liabilities deducted in connection with avoidance schemes, you should ask the taxpayer or agent to provide evidence that the money has been repaid. This might be a copy of the letter enclosing a cheque to the creditor or confirmation of receipt of the payment by the creditor. You should also obtain evidence that the liability has been repaid out of the estate; remembering the extended meaning of estate for this purpose (IHTM28027). This might be a copy of the bank statement from the personal representatives’ bank account, or a ledger entry from the appropriate solicitor’s client account.
Where the personal representatives do not repay a liability during the normal administration of the estate and the exception at IHTM28029 does not apply, you should disallow the deduction and ask for the tax to be paid. If the liability is subsequently repaid, the deduction may then be allowed and the tax repaid, provided the claim for repayment is made within the 4 year period set out in IHTA84/S241. But you do not need to keep the file open to wait to see if the liability is repaid.
Where a liability is not contractually due for repayment until some time in the future and the deceased’s death has not triggered early repayment, the value of the liability, if it is material, should be calculated in accordance with IHTA84/S162(2) (IHTM28110).