Expenses and liabilities

By Tolley

The following Trusts and Inheritance Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Expenses and liabilities
  • General principles
  • Specific provisions
  • Matching liabilities with assets
  • Tax liabilities
  • Claiming a deduction

General principles

Expenses and liabilities may reduce the value of property to be charged to inheritance tax. This general principle arises from the ‘meaning of estate’ given in IHTA 1984, s 5 which includes the provision:

“In determining the value of a person's estate at any time his liabilities at that time shall be taken into account, except as otherwise provided by this Act.”

Transfers of value are quantified with reference to the amount by which a person’s estate has diminished. The transfer on death is equal to the value of the whole of a person’s estate immediately before his death. It follows that the value of transfers is reduced by the associated liabilities.

IHTA 1984, ss 3–4

When considering settled property, inheritance tax is charged with reference to the ‘value of the property or part at that time’.

IHTA 1984, s 64(1)

The value of any property for inheritance tax purposes is ‘market value’. The market value of assets is reduced by liabilities.

IHTA 1984, s 160

The practical application of these general principles to the valuation of property for IHT means that, for example:

  • the value of a death estate is reduced by the deceased's outstanding personal debts such as household bills and credit cards
  • the value of a gift (eg a house) is reduced by liabilities attached to it (eg a mortgage)
  • the value of settled property is reduced by the trustee's outstanding debts such as professional fees

See Example 1, which also illustrates some of the principles described below.

Specific provisions

The general principles are qualified and expanded by a number of specific legislative provisions.

Liability must be legally enforceable

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