CGT becomes a deductible liability on its due and payable date: 31 Jan after previous April 5 or for PPD 60 days after date of disposal. This is apparently the view of HMRC for a s64 RPT TYA charge. Welcome, but is it the law and does it matter if it is not?
The legal authority in IHTA for deducting liabilities at RPT chargeable events is obscure and thus confusing. Enlightenment is not forthcoming from IHTM 42000 or 20000.
At the first and later TYAs tax is charged on the “value” of relevant property(RP). Before the first TYA, and between any two such, tax is charged on the “value” of RP leaving the trust; or on any diminution of “value” effected by the trustees, calculated on a loss to donor basis. Ss 64 and 65, and IHTM04094-7. There is no grossing up at a TYA but there is at an exit charge if the IHT is paid by the trustees.
Now “value” means open market value per s160, including in the RPT charging provisions: these do not say “net value”. There is no general authority for deducting liabilities, save for the limited CGT event under s165(2), which reinforces the general rule. This means logically that s162 itself does not apply to RPT charges nor do s2(3)-(5). Trustees do not have an “estate”, ss2(3),3(4) and the RPT rules do not give them one, and the latter do not define RP as net of them.
Important HMRC practice on what does comprise RP is found in IHTM42161-6 and 42163 deals with CGT (and income tax). A glaring omission is whether they even accept that s162(4)-secured debts-applies, let alone the rest of s162 and indeed s2(3)-(5).
In IHTM42000 when they use “net” value they mean after APR and BPR.
Payment of tax by the trustees is not a chargeable event but perforce then reduces RP value on later events. Para 1 of IHTM42161 indicates that CGT that has fallen due and payable (if actually later paid) is deductible in valuing RP at a subsequent TYA even though then still an unpaid liability. The question is what makes that correct in law.
It is pure common sense but that is not a paramount and overriding rule for interpreting statutes (still less for filling inconvenient gaps in their coverage) and is applied by HMRC only when it suits them. It is only a cross-check with reality after applying other rules in order to avoid absurdity of outcome if possible.
So it is regrettably in my view only enforceable by JR and cannot not be extrapolated to other crystallised but unpaid liabilities or indeed any liabilities at all save for s165(2); that is, in the absence of a case-specific, perlucid HMRC representation meeting the criteria for actionable legitimate expectation, so that credibly threatening it should make them back down. One hopes HMRC would not seek to resile from it.
It does mean that when seeking a deduction for an unpaid but crystallised liability, its nature and amount should be fully disclosed, so HMRC cannot deny proper notice of it. Section F of forms IHT 100c and d are the right loci in quo but the Notes add no guidance beyond IHTM.
As a perennially bewildered student of theology, general and fiscal, I am not able to explain why HMRC offers no exegesis of the basic in principle right of deductibility, if any, of liabilities in RPT charges at TYAs compared with the clarity on a transfer on death; and why their practice at IHTM28061-2 and IHTM28070 on contingent liabilities in the death estate is disowned at para 2 IHTM42163, whereas the deductibility of crystallised unpaid CGT if not other liabilities is conceded by para 1.
If CGT that becomes due and payable 1 day after a TYA is not deductible from RP value under s64, why is it deductible if it falls due and payable 1 day before the TYA? Common sense is surely offended here but HMRC chooses selectively to eschew it. Unless a court adjudicates accordingly in this life the mystery will only be revealed in the Eschaton when one hopes all will be made plain, even tax legislation.
Jack Harper