IHTM14722 - Disallowed debts: calculations

Make separate calculations of the total tax payable as a result of the death

• abating the liability in accordance with FA86/S103 but ignoring the value transferred by the lifetime transfer to the extent of the abatement

and

• charging the lifetime transfer in the usual way but allowing the liability as a deduction without any abatement under S103.

Use the calculation which produces the higher amount of tax payable.

Where the higher amount results from abating the liability and ignoring all or part of the lifetime transfer, you may allow a credit for all or part of any lifetime tax which was payable before the death

Example

Anne makes a gift of £280,000 to Bob in Aug 2000

In Feb 2001, Bob lends £50,000 to Anne

Anne dies in July 2002 leaving a wholly chargeable estate of £400,000. The £50,000 owed to Bob is not deductible because of s.103.

First calculation

Disallow the deduction of the loan and reduce the lifetime charge on the failed PET to the extent of the disallowed liability.

Aug 2000 - after deduction of 50,000 the chargeable PET is 230,000. No IHT thereon.

July 2002 - aggregate chargeable transfer (ACT) of 230,000 PET + 400,000 estate = 630,000

Tax thereon = £152,000 (total tax payable on A’s death)

Second calculation

Charge the failed PET in full, but disregard s.103 and allow the deduction of the loan.

Aug 2000 - tax on 280,000 = £12,000 

July 2002 - ACT of 280,000 PET + 350,000 death estate = 630,000

Tax thereon = 152,000 - 12,000 tax attributable to PET = £140,000 

Total tax to pay = £152,000

Conclusion

Although both calculations yield the same total, they apportion the tax between the gift and the death estate in different ways. You must charge the first calculation and reduce the second to nil, as explained in the instructions for when calculations produce the same amount (IHTM14731).