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HMRC internal manual

Inheritance Tax Manual

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HM Revenue & Customs
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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.

Example

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

110,000

150,000

100,000

50,000    
     

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.