Compensation Money - IHT

Daughter has passed away and we are administering the taxable estate. A few months before death the parents of the deceased initiated a PI claim for medical negligence for which the prospects of success are very good, but of course not certain. The claim value is estimated at c£300,000. As there is uncertainty over whether the claim will be successful and how long matters will take, what value should be recorded in the IHT 400. Is it reasonable to work on the estimated damages, but to apply some form of discount to allow for the time it will take to obtain the damages and risk of not being successful. If so what is reasonable.

The clients are happy to submit a corrective account, but there is a cash-flow issue so we are trying to keep the initial tax to a minimum.

Haroon Rashid
I Will Solicitors Ltd

I suggest the position will depend upon the circumstances of the claim.

If, as suggested, the prospects of success are “very good”, it is likely that HMRC would anticipate that would be reflected in the value disclosed, with a discount to allow for the uncertainty that is inherent in litigation.

However, has liability been accepted?

If it has, and the trial is to decide quantum only, then the discount is likely to be relatively small. However, if liability is disputed, there could be grounds for disclosing the matter using only a nominal valuation, supported by letter setting out the issues being litigated and that liability is being disputed, hence the nominal value currently placed upon the claim. This will allow HMRC to decide if the valuation is “realistic” in the circumstances.

If HMRC accepts the value disclosed represents the true value of the claim as at the date of death, there would seem no need to make a further disclosure for IHT once the claim settles, although CGT considerations might then arise. Having said that, I suspect others might counsel that HMRC IT be informed of the final settlement so as to avoid any potential allegation that there has been a failure to fully disclose.

Paul Saunders