Inheritance Tax - what counts as a liability?

Personal debt to be repaid with RPI indexation - is RPI movement a liability for IHT purposes?

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I'm a reluctant joint executor.

The estate has a debt to an individual for £10,000.  The will provides that settlement will be made by a legacy of £10,000 + RPI increase since the date of the will.

The solicitor says that the liability for IHT purposes is the £10,000 not £10,000 + RPI.  I suspect that this is right.  However, I wonder whether this is a consequence of bad drafting and if better wording might have achieved the same effect with an IHT deduction for the full amount.  The debt was informal and so there is nothing in writing (other than the will).

Not a huge amount at stake but there is IHT to pay so wondered if there might have been a small saving with better wording or if the lack of a loan agreement is the key point.

Thanks for any reponses.

 

Replies (10)

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By Justin Bryant
05th Apr 2023 17:50

Surely the debt should be paid as a liability of the estate, rather than as a bequest (from its assets) and if RPI indexing was agreed (in lieu of interest) then that is the correct liability.

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Replying to Justin Bryant:
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By David Ex
05th Apr 2023 18:00

Justin Bryant wrote:

Surely the debt should be paid as a liability of the estate, rather than as a bequest (from its assets) and if RPI indexing was agreed (in lieu of interest) then that is the correct liability.

Thanks. I'll look out the wording. As you say, it's a debt, so framing payment as a bequest is odd, to say the least. Maybe they were trying to be "clever" in the absence of any written debt agreement?

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By Tax Dragon
05th Apr 2023 18:23

Debt? What debt?

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Replying to Tax Dragon:
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By David Ex
05th Apr 2023 19:47

Tax Dragon wrote:

Debt? What debt?

That’s probably the £10,000 question. The alleged debt “acknowledged” by the will.

I’ll try and get the wording, for what it’s worth.

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By David Ex
05th Apr 2023 22:47

It says "I give free of all Inheritance Tax payable on my death in settlement of a debt owed to [Mr X] for the purchase of ... a legacy to [Mr X] absolutely the sum of money produced by dividing the sum by the index figure ... for the month in which this will is executed and ... multiplying it by the index figure ... for the month in which my death occurs ...".

Seems more strange with each reading.

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Replying to David Ex:
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By Hugo Fair
05th Apr 2023 23:36

Is the author (drafter) of the Will contactable? Or is this the DiY job it sounds like?

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Replying to Hugo Fair:
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By David Ex
06th Apr 2023 10:02

Hugo Fair wrote:

Is the author (drafter) of the Will contactable? Or is this the DiY job it sounds like?

A large local firm with 3 offices. Staggering, I grant you!

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Replying to David Ex:
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By Justin Bryant
06th Apr 2023 09:01

In general, construing wills is no different to construing contracts, although in practice they seem to be generously construed, and in this case this looks merely like a (unilaterally) agreed deferred repayment of the loan upon death, which should make it a valid liability of the estate.

Query whether a will can itself create a debt by being a promissory note. You'd have to check Bills of Exchange Act etc.

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Replying to Justin Bryant:
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By Tax Dragon
06th Apr 2023 12:23

'Doing a Hugo' and applying logic not law... and running that alongside a Justinesque argument... if a will could create debts, wouldn't that be the easiest IHT planning in the world?

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Replying to Tax Dragon:
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By Hugo Fair
06th Apr 2023 14:43

Dang ... that's 1/2 hour over lunch wasted re-drafting my will!

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