The UK First-tier Tax Tribunal has ruled that an income tax rebate owed to a woman immediately before her death that had not yet been repaid counted as part of her estate for inheritance tax purposes.
Background
The taxpayer, Eunice Thomas (the deceased), died in December 2020. She had been receiving a modest income from dividends and UK pensions. For several years, her son (the appellant, as executor of the estate) had been using an enduring power of attorney (EPA) to file her tax returns for income and chargeable gains. The 2019/20 tax return he submitted for her in May 2020 showed a total income tax liability of £1,236.47, which had already been covered by half-yearly payments on account totalling £1,302.50. The deceased was thus owed a £66.03 tax rebate for that tax year, which had not been paid at the time of her death.
After her death, the appellant submitted an IHT return valuing the estate at £476,542.04, with IHT due in the sum of £60,616.82. The IHT400 also recorded an estimated income tax repayment of £1,340 as an asset of the estate.
The appellant also filed a tax return covering the final months of the deceased’s life, declaring an overpayment in the sum of £999.40 repayable by 31 January 2022.
A Change of Mind
Later, however, he changed his mind about the IHT treatment of the overpaid income tax. He now asserted that the income tax repayment should not form part of the estate and sent an amended IHT400 to this effect. He argued that the deceased had no enforceable right or entitlement to any income tax repayment for the tax year in which she died. Accordingly, the appellant argued, there was no ‘property’ to which she was beneficially entitled at that time and no such amount should have been included in the deemed transfer of value under s.4 Inheritance Act 1984.
The Contention
In support of this, he quoted HMRC’s Inheritance Tax Manual: ‘The word “property” for [IHT] purposes includes all types of asset, cash, stocks and shares etc as well as land and buildings. It is defined as including all rights and interests of any description…but we regard this as only including rights and interests that are legally enforceable. It does not extend to a mere hope or right that is not legally enforceable.’
Relying on the 1988 case of Jones v O’Brien, the appellant pointed out that, prior to her death, the deceased had a mere hope that a repayment of any amount would arise after her return for the year had been completed. She would have had no way of computing the precise amount to be attributed to that mere hope. Her death could not have caused a crystallisation of the right to a repayment of income tax, as any repayment does not come into existence as a result of death and s.171 the 1984 Act did not apply. Even if there was property in relation to the repayments, such property had no ascertainable market value immediately before death. The appellant therefore argued that no value should be attributed to it under s.160 the 1984 Act.
HMRC’s Response
HMRC disputed this, noting that under s.5(1) the 1984 Act a person’s estate is the aggregate of all the property to which they are beneficially entitled immediately before death. It argued that a wide meaning should be applied to ‘property’, as was previously considered for an ‘interest’ under s.4 Finance Act 1894 (Estate Duty). Further, it claimed the right to a repayment of taxes is a chose in action.
And The Tribunal Decision?
Ultimately, the FTT found for HMRC. Although it accepted the principle articulated in Jones v O’Brien, it dismissed the judgment as irrelevant: ‘Decisions, even of the most eminent judges, are not to be read as legislation’, it said. In that case, it found, the court did not have in contemplation a situation where the taxpayer died mid-way through the tax year, with income received after death going to the estate.
Further, the FTT placed no weight on the fact that a right to repayment of tax is not included in HMRC’s manuals. Such manuals are merely HMRC’s internal guidance to its staff, it said.
‘The language parliament has chosen to define property is very broad – rights and interests of any description – which is broad enough to include the right to a tax refund’, the FTT added. Agreeing with HMRC, ‘The right to a repayment of taxes is a chose in action [and] the fact that a debt is only payable at a future date does not prevent it from being property at an earlier date’, it said.
The FTT accordingly dismissed the appeal and found that the tax debt formed part of the deceased’s taxable estate (Thomas v HMRC, 2025 UKFTT 1537 TC).
A fairly predictable and clear cut decision which is well worth reading at:
https://www.bailii.org/uk/cases/UKFTT/TC/2025/TC09716.html
Whether such a small sum is worthy of what must have been a considerable time investment in putting together an ingenious, but flawed, argument is left to the reader to opine on.
Stephen Parnham
