The deceased has a retirement property, which cannot be inherited as their beneficiaries are all under retirement age. The property has a requirement that on sale a contribution (in this case £26,000) must be repaid to the management company.
The question is what figure to put on the IHT 400: The valuation provided by the agent/surveyor, the net figure of the valuation less the contribution, or put both the valuation and the liability and explain why we think it is a liability as at the date of death as the estate cannot simply transfer the property to a beneficiary.
We’re inclined to the last option, but would welcome other practitioners’ views.
Mayo Wynne Baxter
I’m not sure it counts as a liability as there was no liability immediately prior to the death.
Your best chance is to take it into account as part of the market value of the asset. It doesn’t easily fit into the definition of market value ("might reasonably be expected to fetch if sold in the open market ") but it is certainly arguable that payments necessitated by the terms of the asset itself, rather than simple (and avoidable) expenses of sale such as agents fees, should be taken into account. The word “fetch” could be read as net consideration received or price paid by the buyer so it is not absolutely clear.
Failing that, I wonder if it might be shoehorned into s.163 (restrictions on freedom to dispose) and/or s.164(b) (transferor’s expenses). Neither is quite on point as the former appears to be intended to prevent discounts for restrictions incurred without consideration rather than create an additional head of deductions but the requirement to make a payment to the freeholder in order to dispose of the asset could be a restriction and s.163 does state that this “shall be taken into account” (turning a Nelsonian eye to the implications of the following “only to the extent…”).
The latter seems more concerned with lifetime transfers, but both are arguable.
Osborne Clarke LLP
As a contractual liability, I would have included it as an outstanding debt of the estate.
Where a person dies having bought their council house at a discount, to the extent that they are liable to “repay” the discount if the property is sold, this is usually declared as a debt. If, by the time of the sale, the amount to be repaid is less, as a result of the transaction occurring after another year anniversary from the date of the purchase, the amount of the debt is generally amended to reflect the actual liability.
Whilst I agree that the repayment in the current instance might be treated as a reduction in the value of the asset, I suspect the reduction would be somewhat less than the £26,000 payable to the freeholder. If the executor is able to substantiate the position – that there is no beneficiary who qualifies to take an assignment of the asset – I would expect HMRC to accept the full amount due to the landlord is a contractual liability of the estate, and deductible for IHT. If the value of the property would exceed any individual beneficiary’s entitlement from the estate, this might also be identified as it clearly impacts the ability to assign the property to a beneficiary.
Alexander v IRC  STC 112 appears to be on point (see IHTM23200). In that case, the lease was subject to a payment under Right to Buy legislation if it was sold within 5 years and the deceased died after only 1. It found that the obligation was an encumbrance on the property and so should be taken into account when valuing the property itself (now s.162(4)). That should apply here if this obligation forms part of the lease or is protected by a charge.
However, unhelpfully, the CA then found that the hypothetical purchaser was one who acquired the property subject to the continuing obligation on a future sale, so the hypothetical sale itself did not trigger the obligation to pay - I imagine this substantially reduced the deduction available in that case.
It may be possible to draw a distinction here because the death has actually triggered the obligation to pay - in Alexander (and Crossland before it) the death did not in itself trigger the obligations/restrictions - but I would expect a fight.
Osborne Clarke LLP
Perhaps not strictly relevant in Fiona’s case, but does the age restriction
in the lease actually bar ownership, or merely occupation, to the “young”?
In the latter case inheritance is an option - especially if the lease
allows the flat to be rented out, albeit only to those of a certain age.
I had a similar case about 4-5 years ago.
I took the view that as the obligation was in the contract at the time the deceased purchased the property it was there at the point of death and should be allowed for IHT purposes.
We eventually decided to deduct it from the market value of the property at the date of death on the IHT form rather than claim it as a deduction. The property value was referred to the DV and I had correspondence with HMRC over the value at the date of death but they did not specifically question the adjustment and the IHT position was agreed on that basis.
Greene & Greene
It would be interesting to discuss this with such as McCarthy & Stone, which company is among those who include these provisions.
I also have had a similar situation. The executors were not aware of the contribution to be paid to the management company until the deceased’s flat it was marketed for sale and so I had to put in a corrective IHT account and I put it down as a debt owed by the deceased. I rang HMRC and they agreed it and the estate got the overpaid IHT back.
Phoenix Legal Group
The deceased has a retirement property, which cannot be inherited as their beneficiaries are all under retirement age.
Is there no way to overcome this ie by way of a bare trust? Thereby the beneficiaries would be liable for future costs?