Income Tax Repayment Part of Deceased Taxpayer's Estate

The First-tier Tribunal (FTT) has ruled that an Income Tax repayment due to a taxpayer who died during a tax year forms part of their estate for Inheritance Tax (IHT) purposes. The decision provides important clarification for executors and personal representatives dealing with estates where tax repayments arise after death.

Background to the Case

The taxpayer died on 18 December 2020, part way through the 2020/21 tax year. Following her death, an Income Tax repayment became due, largely as a result of her personal allowance being applied to a shortened tax year.

Her son, acting as executor, argued that the repayment should not be included in the value of her estate for IHT purposes. He contended that:

• immediately before death, the taxpayer had no enforceable right to a repayment; and
• any potential repayment was not sufficiently ascertainable at the date of death to constitute “property” under the Inheritance Tax Act 1984.

HM Revenue and Customs (HMRC) disagreed and issued a notice of determination including the repayment in the estate’s value. The executor appealed to the FTT.

The Tribunal’s Decision

The FTT accepted that the taxpayer did not have a legal right to repayment immediately before her death, as Income Tax repayments only become payable at a later statutory date.

However, the Tribunal found that:

• the amount of income and tax payable for the tax year was capable of being determined at the date of death;
• a right to repayment can still constitute “property”, even if payment is only due in the future; and
• the taxpayer’s death caused her estate to become entitled to the repayment.

As a result, Section 171 of the Inheritance Tax Act 1984 operated to bring the repayment into the estate for IHT purposes.

Valuation for Inheritance Tax

The Tribunal also rejected the argument that the repayment had no ascertainable value at death. It noted that:

• the right to a tax repayment could be assigned at the time of death; and
• its open market value would be approximately equal to the amount of the repayment itself.

Accordingly, the repayment formed part of the estate and was properly included in the IHT calculation. The appeal was dismissed.

Why This Decision Matters

This ruling highlights that assets arising after death can still form part of an estate for IHT purposes, even if the legal entitlement crystallises later. Executors should take care to identify all potential rights and entitlements when valuing an estate, including tax repayments.

Failure to include such sums may result in disputes with HMRC, delays in estate administration and potential penalties.

Q&A: Income Tax Repayments and Estates

Does an Income Tax repayment always form part of an estate?

Not always, but this case confirms that where the amount is determinable at death and arises as a result of death, it may be treated as estate property for IHT purposes.

What if the repayment is not received until much later?

The timing of payment is not decisive. A future debt can still constitute property at an earlier date.

Who is responsible for dealing with tax repayments after death?

The executor or personal representative is responsible for claiming any repayments and accounting for them as part of the estate.

Can HMRC challenge an estate valuation?

Yes. HMRC has powers to issue determinations and may challenge valuations where assets or rights have been omitted.

Should executors seek legal advice?

Yes. Estate administration often involves complex interactions between tax and probate law, and early advice can prevent costly mistakes.

Contact Us

Administering an estate can be complex, particularly where tax issues arise after death.

If you are acting as an executor or require advice on probate, Inheritance Tax or estate administration, contact Willett & Co Solicitors today. Our experienced team provides clear, practical guidance to help estates be administered accurately and efficiently.