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HMRC internal manual

Inheritance Tax Manual

Liabilities: investigating liabilities: income tax on sums receivable following the discontinuance of a business

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Certain sums received that accrue to a person after they have discontinued a particular trade, profession or vocation are liable to income tax under ICTA 2009 and ITTOIA 2005. Where the right to receive sums of this nature is sold, ICTA88/S106 provides that tax is charged on the sale price or the market value if higher.

If the estate includes the value of the right to receive such amounts you may allow a deduction for the contingent tax liability. In any case where it is claimed that deduction is due for tax under these provisions you should ask the tax office to confirm that these provisions do apply, and whether any deduction for income tax purposes under ICTA 2009 and ITTOIA 2005 is allowable.

The liability must be valued, taking into account the degree of contingency and the likely length of time before the liability will, if ever, mature. When estimating the deduction it must be borne in mind that the receipts will be earned income and, unless the right to the receipts is sold outright, any tax liability may accrue over a number of years. The instructions on contingent liabilities at IHTM28070 should be followed.