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HMRC internal manual

Inheritance Tax Manual

Liabilities: law relating to debts: dealing with deficits

We take the view that a liability at any title may only be deducted against the assets at that title. This means that if there is an overall deficit on the free estate you cannot set this against the value of settled property. This is derived from the judgements of Lawrence J and the Court of Appeal in Re Barnes (deceased) [1938} 2 KB 684 in the first instance and [1939] 1 KB 316 CA. It is considered that these decisions, based on the relevant estate duty provisions in the 1894 Finance Act apply equally to the corresponding provisions in the Inheritance Tax legislation. But a contrary view is possible in view of IHTA84/S5 (1) and IHTA84/S49 (1). If the official view is contested and the tax involved is substantial you should refer the matter to Technical. (This content has been withheld because of exemptions in the Freedom of Information Act 2000)  

You should treat a deficit on joint survivorship property in a similar way. The deficit cannot be set against the assets at another title. But a deficit on joint property that passes under the Will can be set against free estate assets.

You may generally allow a deficit in the deceased’s estate that does not qualify for the instalment option to be set against the property that qualifies for the instalment option. If the value of the instalment option assets is insufficient to cover the liabilities, then the balance can be carried forward and set against any foreign property that the deceased owns. You may also allow any excess liabilities on the instalment option property against the non-instalment option property with any balance being carried forward against any foreign property, if any.