IHTM28120 | Liabilities: investigating liabilities: future payments incurred under S262
From HM Revenue & Customs · Inheritance Tax Manual
provides that special rules apply for charging tax where:
there is a disposition which results in a transfer of value,
the disposition is made for partial consideration in money or money’s worth, and
the transferor makes a payment more than one year after the disposition was made.
The application of these rules is explained in detail in the chapter that deals with lifetime transfers ().
Where applies, and the transferor dies while there are still outstanding liabilities, the personal representatives have to complete the remaining payments. But under the whole of the outstanding sum may not be deducted. An allowance may only be given for the non-gratuitous part of the remaining payments. In other words, the liability still outstanding is reduced by its chargeable portion as defined in so that the chargeable portion is effectively taxed by not being deducted from the estate as a valid liability.
Example
In 2003 Abdul buys a property from Brian for £200,000.
The property is worth £100,000.
Abdul pays £40,000 immediately, with the balance to be paid in five annual instalments of £32,000.
The discounted value in 2003 of the instalments is (say) £110,000 and the property is conveyed to Abdul immediately.
Abdul dies in 2007 with one instalment of £32,000 outstanding.
Non-gratuitous part of the instalment unpaid at the date of Abdul’s death
Abdul has received a property worth £100,000 for total consideration of £150,000 (£40,000 + £110,000), leaving him with a loss of £50,000.
So the non-gratuitous portion of each payment made by Abdul is:
100,000 ÷ 150,000 = two thirds
The liability for the outstanding instalment of £32,000 should be reduced to two thirds. (Because the outstanding instalment was not due at the date of death, we may need to begin with a discounted value under () rather than the full amount of £32,000.)
If you get a case where a deduction is claimed for liabilities, you should refer the claim to Technical for advice.