SVM108080 - Inheritance Tax: Sums due to/from the Company

Sums due from the company

Sums due to the deceased from a company do not qualify for business relief. Valuers should check for the existence of sums due to the deceased and, where they have been disclosed, should check the information provided against the position disclosed in the accounts.

As stated at IHTM19000, the value for tax of a debt payable on demand should normally be its face value. Most directors’ loans to companies are made as a result of informal arrangements and so would be repayable on demand. If there are (unusually) special terms regarding repayment, payment of interest etc, a valuer should ascertain all the facts and ask for copies of the documents evidencing the terms of the loan.

The usual reason put forward for a debt having a value below face value is not because of any special terms regarding repayment but on the grounds that, because of its financial position, the company is unable to repay the debt wholly or in part. The debt should be valued on normal open market lines in accordance with section 160 IHTA 1984. Section 166 IHTA 1984 may also be relevant. This provides that, "In determining the value of a right to receive a sum due under any obligation, it shall be assumed that the obligation will be duly discharged, except if or to the extent that recovery of the sum is impossible or not reasonably practicable and has not become so by an act or omission of the person to whom the sum is due." The section puts the burden of proof on the person who alleges that a debt is worth less than its face value.

In considering the value of debts which are claimed to have a value less than their face value, the following factors should be taken into account:

  • the burden of proof is on those who claim that the debt is worth less than face value,
  • debts due to deceased shareholders have to be valued on normal open market lines in accordance with section 160 IHTA 1984. just because a company is making losses does not mean that a debt to a deceased person is worth less than face value. The company might have substantial assets out of which it could pay the debt,
  • if the company can meet the liability out of its existing assets or out of its trading income, the debt may be worth its face value. It may have a value below its face value only if it cannot be repaid at all or there will be a delay in repayment,
  • Where a company’s shares have a nil value (for example because of losses combined with an overall net deficit on assets) it does not necessarily mean that a debt due to the deceased would have a nil value. If the company did go into liquidation, the deceased would rank as an ordinary creditor (assuming the debt was not secured) and would thus rank equally with other ordinary creditors for the purpose of any distributions by the liquidator.

Sums due to the company

Sums due to the company from a deceased shareholder, for example on loan account, should be dealt with in a similar way.

Additional Guidance: SVM150000