Tax Rebate Owed to Deceased Estate: What You Need to Know

When a person passes away, handling their financial affairs becomes a critical responsibility for the executor. One area of concern is whether a tax rebate owed to the deceased forms part of their estate for inheritance tax (IHT) purposes. In a recent case, the UK First-tier Tax Tribunal (FTT) provided clarity on this issue, ruling that a tax rebate owed to deceased estate at the time of death should be included in the estate for IHT calculations. This decision is crucial for those managing estates and handling tax rebates, as it confirms that tax rebates are indeed treated as assets of the estate, impacting the overall inheritance tax liability.

This ruling provides both guidance and practical implications for executors and estate administrators in understanding how a tax rebate for deceased person is handled under UK inheritance tax law. The clarity on this issue ensures that tax refunds owed to the deceased are accounted for correctly, helping to avoid future disputes or errors in inheritance tax return for deceased estate submissions.

What Was the Case About?

The case involved the late Eunice Thomas, who passed away in December 2020. Eunice had been receiving income from pensions and dividends and had designated her son to manage her financial affairs via an enduring power of attorney (EPA). In May 2020, a tax return was filed on her behalf for the 2019/20 tax year, which showed an overpayment of income tax amounting to £66.03. Although the rebate was not paid before her death, the contingent right to the repayment existed at the time of death, making it an asset for inheritance tax (IHT) purposes, as per HMRC’s guidance.

Following Eunice’s passing, her son, as executor of the estate, filed an inheritance tax return for deceased estate, valuing the estate at £476,542.04, which included an estimated income tax repayment of £1,340 as part of the estate’s assets. However, the son later amended this IHT return, claiming that the tax repayment should not be included in the estate. He argued that, as the deceased had no enforceable right to the repayment at the time of death; it should not be considered property for IHT purposes.

However, as HMRC’s guidance in the Inheritance Tax Manual (IHTM28330) confirms, income tax overpayments owed at the date of death are treated as property passing on death if there is a contingent right to them, which was the case here. The son’s amendment was rejected, as section 5(1) of the Inheritance Tax Act 1984 defines property broadly, including choses in action like tax repayment claims, which must be valued at the time of death.

What Did the Tribunal Decide?

The FTT sided with HMRC, ruling that the right to the tax rebate for deceased person was indeed part of Eunice’s estate. The tribunal clarified that, while the tax rebate would only be paid after her death, the right to receive that payment existed before her passing and was therefore an asset of the estate. According to the FTT, the term “property” under the Inheritance Tax Act (IHTA) includes all forms of rights and interests, including those that may be payable in the future. Therefore, the right to a tax rebate is considered property for inheritance tax purposes, even though it would not be paid out until a later date

The FTT also rejected the appellant’s argument that the tax rebate was merely a “hope” and not a legally enforceable right. The tribunal found that the right to the repayment existed at the moment of Eunice’s death and became part of the estate, subject to inheritance tax.

Why Executors Should Include the Tax Rebate Owed to Deceased Estate in the IHT Return

This ruling serves as an important reminder to executors and administrators of estates that any tax rebates owed to a deceased individual should be included in the IHT return. Even if the rebate is not payable until a later date, the right to receive it exists as an asset of the estate. When valuing the estate for inheritance tax purposes, executors must properly account for any expected tax refunds or rebates.

It’s also worth noting that the FTT’s decision reinforces the broad definition of “property” under inheritance tax law, which includes not only physical assets like cash or property but also rights and claims, such as the right to receive a tax rebate.

How Can Apex Accountants Help With Inheritance Tax and Estate Administration?

At Apex Accountants, we offer expert services to help you manage the complexities of inheritance tax and estate administration. Whether you are an executor or a family member handling an estate, we can guide you through the process with clarity and precision.

Our services include:

• Inheritance Tax Planning: We offer advice on how to reduce inheritance tax liabilities and ensure tax-efficient estate planning.
  
• Estate Administration: We assist executors with all aspects of managing an estate, ensuring that all assets, including tax rebates, are properly included in the IHT return.
  
• Tax Rebate Advice: We provide expert guidance on how income tax rebates should be treated in an estate and help ensure they are correctly included for inheritance tax purposes.
  
• Final Tax Returns: Our team can assist with filing final tax returns for deceased individuals, including any income tax rebates due.
  
• Asset Valuation: We ensure all assets, including intangible rights like tax rebates, are properly valued as part of the estate.

For expert advice on managing tax rebates in estates and navigating inheritance tax, contact Apex Accountants today. Our experienced team is ready to assist you with all aspects of estate administration. Book your free consultation today!

FAQs

What Happens to Tax Rebates Owed to a Deceased Person?

Tax rebates owed to a deceased individual form part of their estate for inheritance tax purposes, even if the payment is made after death.

Should Tax Rebates Be Included in an IHT Return?

Yes, any tax rebates owed to the deceased at the time of death should be included as assets in the IHT return.

Are Tax Rebates Considered Property for Inheritance Tax Purposes?

Yes, the right to a tax rebate is considered property for inheritance tax purposes, as it is a legally enforceable right.

Can a Tax Rebate Be Excluded From an Estate for Inheritance Tax?

No, unless there is a specific exemption. The right to a tax rebate is considered part of the estate and should be included in the inheritance tax calculations.

How Can I Reduce Inheritance Tax Liabilities on an Estate?

Strategic planning, such as gifting during the deceased’s lifetime, using trusts, and taking advantage of exemptions, can help reduce inheritance tax liabilities.