Inheritance Tax Act 1984 section 175A

Discharge of liabilities after death

Section 175A sets out the rules governing when liabilities of a deceased person may be deducted in valuing their estate for inheritance tax purposes, focusing on whether those liabilities have actually been paid after death.

• A liability may only be deducted from the estate value if it is actually discharged on or after death out of the estate or from excluded property, unless there is a genuine commercial reason for it remaining unpaid and no tax advantage motive.
• Where a liability remains undischarged, it can still be deducted provided the creditor is at arm's length (or an arm's length creditor would not demand repayment) and obtaining a tax advantage is not the main purpose of leaving it unpaid.
• Any liability disallowed under these rules is also excluded when calculating the increase in value of a surviving spouse's or civil partner's estate for the purposes of the spouse/civil partner exemption.
• Where a liability is only partly discharged, the repayment is applied in a set order: first against the portion attributable to excluded property, then against non-residents' foreign currency accounts, then against relievable property, and finally against any remaining portion.