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HMRC internal manual

Inheritance Tax Manual

Liabilities: law relating to debts: deducting liabilities that are charged or fixed to specific property

Where a liability is an encumbrance on any property you should deduct it, as far as is possible, from the value of that property, IHTA84/S162 (4). Examples of an encumbrance are a mortgage on land or security fixed on moveable property. Some of the implications of treating a liability in this way are listed on the page that deals with mortgage (IHTM28210) liabilities.

For valuation purposes the entity to be valued is the property subject to the liability charged on it.


In Alexander v IRC [1991] STC 112 the owner of a leasehold flat died within a year of acquiring it under the right-to-buy (IHTM23192) provisions of the Housing Act 1980 (re-enacted in the 1985 Act). Under those provisions the owner had to make a repayment to the landlord if she disposed of it within five years of acquiring it. The provisions for repayment were not triggered by the deemed transfer under IHTA84/S4) or by the hypothetical sale under IHTA84/S160.

The flat could not in fact have been sold subject to the liability charged on it. The Court of Appeal applied the principle in IRC v Crossman [1937] AC 26 and held that the flat must be valued under IHTA84/S160 as if it remained subject to the charge in the hands of the purchaser. In other words, the value reflected the charge that would be due if it was sold.

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)

This method of valuing property where there is a charge applies generally for Inheritance Tax purposes. For example, it also applies in arriving at

  • a value against which business relief (IHTM25082) or agricultural relief (IHTM24150) is given, and
  • the value of a specific gift for grossing (IHTM26000) purposes.