Inheritance Tax Act 1984 section 174

Income tax and unpaid inheritance tax

Section 174 allows certain income tax liabilities to be deducted when valuing a deceased person's estate, and provides that any inheritance tax liability included as a deduction but not actually paid from the estate must be added back to the estate's value.

• When valuing an estate immediately before death, a deduction is allowed for income tax arising on offshore income gains that are deemed to be disposed of on death.
• A deduction is also allowed for income tax arising on deeply discounted securities that are treated as transferred on death.
• If an inheritance tax liability has been deducted in calculating the estate's value but that tax is not ultimately paid out of the estate, the estate's value must be increased by the amount of unpaid tax.
• The effect of the "add-back" rule is to ensure that inheritance tax deductions only reduce the estate where the tax is genuinely borne by the estate itself.