A First-tier Tribunal (FTT) has addressed a technical, though significant question in inheritance tax (IHT) law: whether a right to an income tax repayment, which only crystallises because of a death, should be included in the deceased’s estate.

Facts:

Mrs. Eunice Thomas passed away in December 2020 and, because she died mid-way through the tax year, her personal tax allowance exceeded the income she had actually received up to her death. This resulted in a significant overpayment of tax, which HMRC later refunded to her estate.

The executor of the estate, Richard Thomas, argued that this repayment should not be taxed as part of the estate. His primary contention was that, at the exact moment of her death, Mrs. Thomas had no "enforceable right" to the money because the tax year had not ended, no tax return had been filed, and thus no assessment had been made. Thus, he characterised the potential refund as a "mere hope" rather than actual property. Essentially, he argued that, since the refund was triggered by the death itself, it could not have been "property to which she was beneficially entitled" immediately before she died.

HMRC, however, maintained that the right to a tax refund is a "chose in action"—a legal right to sue for a debt—and falls under the very broad definition of "property" under the 1984 Act. They also relied on a specific statutory rule (Section 171), which dictates that changes in value that occur because of a death should be treated as though they happened just before the death.

Decision:

The FTT dismissed the appeal, ruling in favour of HMRC. The Judge determined that the income tax repayment of £1,065.43 was indeed an asset of the estate and therefore subject to IHT at the 40% rate. The Tribunal found that the right to a tax refund is a chose in action and, even though the tax return had not yet been filed at the moment of death, the figures were "knowable," and thus the result was certain. This made it a legally enforceable right rather than a "mere hope".

The Judge ruled that, even if the right to the refund only crystallised because the tax year was cut short by Mrs. Thomas's death, Section 171 of the Inheritance Tax Act (IHTA) 1984 applied. This section creates a legal fiction where additions to the estate caused by death are treated as though they existed immediately before death.

The Tribunal rejected the argument that the right had ‘no value’. Under Section 160, the "open market value" was deemed to be the face value of the refund, as a hypothetical purchaser with knowledge of any given tax affairs would have paid that amount to acquire the right to the repayment.

Implications:

This case confirmed a very broad interpretation of "property" under Section 272 IHTA 1984. The case establishes that an asset does not need to be quantified by a formal document (such as a tax return or a court judgement) to be considered property. If a right is "knowable" and mathematically certain at the moment of death, it is therefore a chose in action. This prevents executors from arguing that intangible assets are "mere hopes" simply because the paperwork has not been completed.

Thus, when a person dies mid-tax year, the "accrued" portion of their personal allowance often creates the instance of a refund. This case confirms that this "accrued value" is part of the estate.