IHT Deductions - Income tax penalties

I am dealing with an estate where, due to her failing capacity, the elderly deceased had failed to file returns or pay income tax in Switzerland for a number of years. The family (now executors) began resolving this during her life and negotiations continue after her death but substantial penalties look likely. She moved to a UK care home and revived her UK domicile shortly before death and the question is whether these Swiss penalties would be deductible (I have assumed that back taxes and interest to death would be deductible).

Foreign income tax is deductible for IHT purposes (albeit, I understand, only against property in that country - IHTM28100) but I can find nothing on penalties - UK or foreign.

My thought was that automatic penalties arising, or discretionary penalties imposed or agreed, prior to death should be deductible as they are liabilities accrued at death.

Would anybody be able to confirm (or deny!) this and perhaps explain whether discretionary penalties imposed after death but relating to pre-death income might be deductible? Perhaps as unascertained liabilities to be estimated if the figures do not emerge before the account is filed.

Andrew Goodman
Osborne Clarke LLP

Section 5(5) IHTA in principle authorises an IHT deduction for liabilities imposed by law. That would include foreign penalties as well as foreign tax.

The amount of the deduction should be estimated as best you can, and subsequently revised in the light of the actual payment.

I would not accept that IHTM28100 is a correct statement of the law – see chapter 72 of my Taxation of Nonresidents & Foreign Domiciliaries (IHT deduction for debts), 15th edition, just out. But that question may not arise in your particular case.

James Kessler QC
15 Old Square
Lincoln’s Inn


Can a penalty imposed on an individual be enforced after their death? I can see that interest, of course, would be. But a penalty, like a fine, is personal to the individual and if the penalty was not actually in existence at death, I would have thought it falls away as a result of the death.

That is applying UK law, of course, and the law of Switzerland might be different.

Julian Cohen