IHT and bad debts

[isleofthorns]

In the middle of trying to put together an IHT submission as an executor of an estate
The estate has an overseas loan that is potentially a bad debt - the borrower of the loan recently died and no payments had been made since 2018.
Question - do I include the balance due as an outstanding asset (on which the estate will have to pay IHT, even though I don't hope to recover)? Or do I exclude?

[Simpo Two]

No idea, but two thoughts - is a debt an asset? And can you pay tax on money you don't have?

Technically I'd write it off as a bad debt.

[Eric Mc]

A debt (money owed to you by someone) IS an asset - up to the moment the debtor cannot pay you, at which point it has to be written off.

If you have an estate worth £100,000 of which £40,000 of that is made up of monies owed to you and you then discover that of the £40,000, you won't be able to collect £20,000, then your estate is really only worth £80,000.

Entities pay tax on money they don't have all the time. In business, accounts are generally prepared on the "accruals" basis meaning that sales and costs are accounted for when the obligation to pay is created - usually when an invoice is generated. The cash may arrive (much) later.

[Simpo Two]

Eric Mc said:

A debt (money owed to you by someone) IS an asset - up to the moment the debtor cannot pay you, at which point it has to be written off.

Thanks. Perhaps the OP should approach the debtor's executor and remind him the money is due. The executor might be more keen on sorting stuff out than the debtor was.

[isleofthorns]

Eric Mc said:

A debt (money owed to you by someone) IS an asset - up to the moment the debtor cannot pay you, at which point it has to be written off.

If you have an estate worth £100,000 of which £40,000 of that is made up of monies owed to you and you then discover that of the £40,000, you won't be able to collect £20,000, then your estate is really only worth £80,000.

Entities pay tax on money they don't have all the time. In business, accounts are generally prepared on the "accruals" basis meaning that sales and costs are accounted for when the obligation to pay is created - usually when an invoice is generated. The cash may arrive (much) later.

Thanks - I get how this works with company accounts, in the sense you can adjust or write off in later periods. As IHT is more of a one-off tax, I'm just curious whether HMRC allow for a post-payment reassessment and ability to reclaim any tax paid in the initial phase, if the estate subsequently cannot recover the debt? Or, do you calculate without including the dubious debt, declare to HMRC its existence, and agree to make a further payment at the point of recovery?

[Eric Mc]

I would endeavor to validate the status of the debt BEFORE finalising any IHT submissions. I would certainly NOT write it off UNLESS it was irredeemably non-recoverable.

If it is non-recoverable, you should have evidence to prove that it is, such as a liquidator's statement or proof that the debtor is bankrupt.

[Simpo Two]

Probate - or its equivalent in that country - would be fairly good proof no monies will be forthcoming as it means all affairs are completed.

[Eric Mc]

I would think IHT is based on the date of probate - by which time a decision will have been made about the recoverability of potential bad debts.

[Burwood]

isleofthorns said:

In the middle of trying to put together an IHT submission as an executor of an estate
The estate has an overseas loan that is potentially a bad debt - the borrower of the loan recently died and no payments had been made since 2018.
Question - do I include the balance due as an outstanding asset (on which the estate will have to pay IHT, even though I don't hope to recover)? Or do I exclude?

If the borrower recently died (well after defaulting) then you have zero chance of recovery unless there is some sort of security or you've had a positive response from their executor. I suspect you have none of that, in which case write it off and exclude from your submission.

[isleofthorns]

Eric Mc said:

I would think IHT is based on the date of probate - by which time a decision will have been made about the recoverability of potential bad debts.

You'd think so, but probate isn't granted till IHT has been dealt with, so it's little bit of cart before the horse.

[isleofthorns]

Burwood said:

If the borrower recently died (well after defaulting) then you have zero chance of recovery unless there is some sort of security or you've had a positive response from their executor. I suspect you have none of that, in which case write it off and exclude from your submission.

it was to his company, not him personally. Although the company is operating, we understand this is at a low level. The total remaining is around 13k, and the company in based in Kenya, so the recovery costs to pursue legally may not be worth it. We have of course requested payment to the estate, but we're expecting not much to come from this.

[Simpo Two]

isleofthorns said:

You'd think so, but probate isn't granted till IHT has been dealt with, so it's little bit of cart before the horse.

The difference here is that the IHT and probate involve two different estates. The IHT is the OP's business; probate is the business of the deceased's executor.

So if the 'other' party gets probate, the OP knows the debt can be written off.

[Eric Mc]

isleofthorns said:

Burwood said:

If the borrower recently died (well after defaulting) then you have zero chance of recovery unless there is some sort of security or you've had a positive response from their executor. I suspect you have none of that, in which case write it off and exclude from your submission.

it was to his company, not him personally. Although the company is operating, we understand this is at a low level. The total remaining is around 13k, and the company in based in Kenya, so the recovery costs to pursue legally may not be worth it. We have of course requested payment to the estate, but we're expecting not much to come from this.

Write it off in the company, so the value of the company is devalued for IHT purposes. Also, if the company can write a bad debt off, it will reduce its Corporation Tax bill - or maybe even claim a Corporation Tax refund from earlier years.