How does death affect the status of income tax rebates due to the taxpayer?
This important question has been answered by the First Tier Tax tribunal and, unless an appeal is lodged, the outcome is important for all tax and private client practitioners and their clients.
The FTT concluded that the value of a deceased estate included an income tax rebate owed to the taxpayer who died in December 2020. The amount was due to be paid out the following month.
Each individual has an annual income tax personal allowance which, if they are paid via the PAYE system, is spread over the full tax year (ending 5 April). If, at the end of the tax year, there is an unused element of the personal allowance; and/or the taxpayer has paid an excess of income tax on account for that tax year, a tax refund will subsequently fall due.
Sometimes, the taxpayer dies during a tax year and the personal allowance for that year is therefore spread over a shorter period.
The taxpayer
In Thomas v HMRC, 2025 UKFTT 1537 TC, Mrs Thomas died on 18 December 2020. Her estate had an IHT liability of around £60,617. For the tax year 2019-20, Mrs Thomas had paid an excess of income tax on account and a refund was due to be paid on 31 January 2021.
The appellant (her son) also filed a tax return for Mrs Thomas’ final months (April to December 2019), declaring a further overpayment of £999.40 (which was repayable by 31 January 2022). At first, the appellant considered that the income tax repayments formed part of the estate, but he then changed his mind.
He argued that immediately before her death, Mrs Thomas had no enforceable right or entitlement to any income tax repayment for the 2020-21 tax year as there was no "property" under s272 IHTA 1984 to which she was beneficially entitled at that time. Therefore, it should not have been included in the deemed transfer of value under s 4 IHTA.
The FTT rejected his argument.
Effect of death
Under s5(1) IHTA), a deceased estate is the aggregate of all the property to which they are beneficially entitled immediately before death.
Before her death, Mrs Thomas had no beneficial right to the income tax refund given that the personal allowance was anticipated to be spread over the full tax year. It was not until the date of death that the amount of the refund was ‘knowable’ (but not immediately payable). In other words, it was her death that made the amount knowable.
The FTT characterised the right to a repayment of taxes as a chose in action, and there was no right to demand the repayment until 31 January 2021. However, on the date of death Mrs Thomas’ estate was entitled to the refund (at that point a ‘knowable’ amount). It was, therefore, part of her estate for the purposes of s171 IHTA.
This decision provides important clarification on an issue that potentially affects many deceased estates. If you have any concerns relating to complex tax issues during an estate administration, consider taking expert advice from tax specialists.
If you would like us to cover an issue in the next NGM Tax Law Newsletter, we would be pleased to hear from you.