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HMRC internal manual

Inheritance Tax Manual

Liabilities: investigating liabilities: future payments incurred under S262

IHTA84/S262 provides that special rules apply for charging tax where:

  • there is a disposition which results in a transfer of value,
  • the disposition is made for partial consideration in money or money’s worth, and
  • the transferor makes a payment more than one year after the disposition was made.

The application of these rules is explained in detail in the section that deals with lifetime transfers (IHTM14000).

Where IHTA84/S262 applies and the transferor dies while there are still outstanding liabilities the personal representatives have to complete the remaining payments. But under IHTA84/S175 the whole of the outstanding sum may not be deducted. An allowance may only be given for the non-gratuitous part of the remaining payments. In other words, the liability still outstanding is reduced by its chargeable portion as defined in IHTA84/S262 (2) so that the chargeable portion is effectively taxed by not being deducted from the estate as a valid liability.


In 2003 Abdul buys a property from Brian for £200,000.

The property is worth £100,000.

Abdul pays £40,000 immediately, with the balance to be paid in five annual instalments of £32,000.

The discounted value in 2003 of the instalments is (say) £110,000 and the property is conveyed to Abdul immediately.

Abdul dies in 2007 with one instalment of £32,000 outstanding.

Non-gratuitous part of the instalment unpaid at the date of Abdul’s death

Paid immediately

Instalments at 2003 value

Total consideration

Property received

Loss to Abdul 40,000





So the non-gratuitous portion of each payment made by Abdul is

100,000 ÷ 150,000 = two thirds

The liability for the outstanding instalment of £32,000 should be reduced to two thirds. (Because the outstanding instalment was not due at the date of death, we may need to begin with a discounted value under IHTA84/S162(2) (IHTM28110) rather than the full amount of £32,000.)

If you get a case where a deduction is claimed for IHTA84/S262 liabilities, you should refer the claim to Technical for advice.