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HMRC internal manual

Inheritance Tax Manual

Liabilities: investigating liabilities: extent to which sums payable to third parties are allowable

IHTA84/S5 (5) limits the amount of any liability that can be deducted to the extent that it was incurred for a consideration in money or money’s worth. Consideration should be judged by ordinary commercial standards. Put simply, we would look at what the transferor received in return for what they gave. For contracts made after 11 May 2000 we would assume that any undertakings the parties entered into for the benefit of any third parties were enforceable by that third party.

The deduction should take account, in the usual way, of the time and the probability of payment under the terms of the agreement. The value of an allowable annuity, for instance, should be calculated by following the normal instructions (IHTM16211)


Paul says he will pay for a new extension on Laura’s house if Frank builds it.

Frank builds the extension but does a terrible job and it collapses. Paul dies a few days after paying Frank for the work. The 1999 Act (IHTM28291) means that Laura can take Frank to court to make him either fix the extension or repay Paul’s money.

Paul has made a transfer of value (IHTM04024) when he asked Frank to build the extension. If Laura has the money repaid to Paul’s estate seek advice from Technical about which charges arise.

Using the same basic facts, what would happen if Frank had died instead of Paul? If Paul had paid for the extension we might see a bill from Laura for the amount paid for the work or the costs of repairing the extension as a deduction in Frank’s estate. This would be allowable.

What if Frank built a great extension and Paul died before paying him? This would mean there would be a genuine debt in Paul’s estate and Paul would have made a transfer of value to Laura.

If you have any difficulties with a case where this sort of issue arises you should refer the case to Technical.