skip to main content

Can executors of an estate get a refund on Inheritance Tax? First-tier tribunal finds in favour

27th Jan 2023 | Private Client
Inheritance tax refund tribunal

A recent case regarding Inheritance Tax in the First-Tier Tax Tribunal has been found in favour of the Executors of an estate.

In the reported case - Hall & another v Revenue and Customs Commissioners - there was only one asset of any significance: a residential property in London.  

This article by Tim Boardman, partner in our Private Client team, explains what happened and how the conclusion was found.

Executors of the estate paid Inheritance Tax on an occupied house

The original owner had left her estate, including the house, to her nieces and nephews and a friend (the Beneficiaries).

However, a companion who had supported and cared for her at the end of her life was given a right to continue living in the house for as long as he wished.  

When the owner died in 2004 the value of the house put the estate over the threshold for Inheritance Tax and there was a bill to pay of £15,600.  

Unfortunately, there was no money in the estate to pay it so the Executors consulted with the Beneficiaries and explained the legal position.  

One way or another, the tax bill had to be paid. They had no unilateral power to mortgage the property and if they had they ran the risk of being sued for reducing the value of the property by burdening it in that way.  

The Executors believed the only option was to sell the property subject to the companion’s right of occupation – which would impact the open market value.  

Faced with this, and considering the wishes and intentions of the deceased, the Beneficiaries opted to pay the IHT bill themselves.

Higher property value means higher Inheritance Tax

The companion continued to live in the house until 2017, during which time it had gone up in value to £827,000.  When he passed away the Executors paid the tax on the basis that he had an Interest In Possession (IIP) in the house.

This is legally defined as “a present right to the present enjoyment of the property”.  If it is land then it is a right to either occupy or receive the net rents but it is not a right to the capital value of the asset.  

Where an IIP arises the whole value of the asset is included in the estate when calculating IHT hence, in this case, the IHT bill of £190,000.  

Why did the executors request an inheritance tax refund?

More recently, on advice, the owner’s Executors requested a refund.  HMRC refused, stood their ground and issued a notice of determination.  

The Executors appealed that determination to the Tribunal.

Their argument was that the companion did not have an IIP and never could have under the terms of the Will because of the Tax liability.  

Tribunal conclusions

The Tribunal concluded that without the intervention of the family the Executors would have had no choice but to sell the house and could never have put the owners Will into effect.

The companion could never have held an Interest in Possession and therefore only ever occupied the property as a gratuitous licensee.  

HMRC have been given leave to apply for permission to appeal.  What happens next will be keenly awaited.

For more information or to find out how the Private Client team can help you with Inheritance Tax queries, contact Tim Boardman directly using [email protected] or 0191 211 7976.

 

Share this story...