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HMRC internal manual

Inheritance Tax Manual

HM Revenue & Customs
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Liabilities: investigating liabilities: contingent inheritance tax liability

A contingent liability to pay Inheritance Tax may arise if the deceased had received a potentially exempt transfer (PET) (IHTM04057). This is because the deceased may be liable as transferee if the transferor dies within seven years of the making the gift.

You may allow a deduction for any Inheritance Tax liability that arises as a result of the transferor’s death but limited only to the extent that it is actually paid out of the estate. This applies even if the deceased died before the transferor.

The personal representatives may claim that the wording of IHTA84/S162 (2) allows a deduction to be made before the transferor dies. This would mean valuing the liability at the deceased’s death and not only estimating the liability but also making allowances for factors such as the transferor’s life expectancy. If they do raise this point you should draw their attention to IHTA84/S174 (2), which says:

‘Where in determining the value of a person’s estate immediately before his death a liability for Inheritance Tax is taken into account, then, if that tax or any part of it is not in the event paid out of the estate, the value of the estate immediately before his death shall be treated as increased by an amount equal to that tax or so much of it as is not so paid’

You should suggest that it would be too early to allow a deduction at this stage because of the uncertainties. If the transferor does not survive the seven year period any tax payable out of the estate that is attributable to that gift will be allowed in full.

Any objections to this approach should be referred to Technical.