personal finance

Can I include IHT costs in my compensation claim?


I have gifted a family holiday home to my children. I am in my early seventies and expected to live considerably longer than the seven years required to avoid paying inheritance tax (IHT) on that gift. Unfortunately, I have been diagnosed with mesothelioma and the prognosis is not looking great. It is likely that the £500,000 holiday home gift will now fall into my estate for IHT. I am pursuing a compensation claim for the exposure to asbestos while working, and wondered if I can include the IHT liability I now face?

Paul Hewitt, partner at law firm Withers, says you are right to consider this issue given the sad news you have received about your health. If you made the gift before the diagnosis — or can prove that you were in the process of making it — you should be able to establish there is a loss.

Data from the Office for National Statistics as at September 2019 suggest the average 75-year-old male will live for over another 11 years and females just under 14 more years. That supports the probability that you would have passed the seven-year requirement for the gift to be exempt from inheritance tax (IHT) under other circumstances.

The “loss” will be the IHT that arises if you die within seven years. Strictly, you personally will not experience the loss, so the compensation should be paid to your estate. Or you may agree a lump sum now to achieve a clean break — there will be a negotiation over that lump sum to reflect probabilities.

You do need to be careful that the gift is going to be effective. HM Revenue & Customs will disregard a gift if it considers you have “reserved a benefit”, in other words if you personally are still enjoying the use of the gift in some way.

Holiday homes are tricky in this context, and if your children still invite you to use the holiday home, for example, for family holidays, this may be a reservation of benefit that renders the gift ineffective for inheritance tax purposes. If the holiday home is outside the UK there may also be local taxes to consider.

Paul Hewitt, partner at Withers © Handout

IHT may not be the only tax to consider. For instance, if the property increased in value and was standing at a gain when you made the gift, you may have incurred a capital gains tax (CGT) liability, whereas if you had retained the property, it would have benefited from an uplift to market value on your death for CGT purposes.

It is certainly worth including the anticipated inheritance tax burden in your claim.

Helen Childs, partner at law firm Royds Withy King, says that the incidence of mesothelioma, an asbestos-related cancer, sadly continues to rise decades after the use of the material was banned in the UK.

In no way can an award of damages compensate you and your family for your loss. In principle, though, compensation for mesothelioma is supposed to place an individual in the same financial position they would have been in had they never developed the illness. In theory, therefore, a claim for any IHT that would not otherwise have been due is possible. In practice, however, the loss is one that will be incurred by your estate and not you personally.

This highlights a dilemma that people who are diagnosed with a life-limiting condition face in the context of any claim they pursue: the compensation payable is assessed differently for the individual concerned rather than for their estate.

Helen Childs, partner at Royds Withy King © Studio8 Ltd

The general rule of thumb is that a claim for someone who is married or cohabiting with a dependant is likely to be more valuable when concluded by their estate rather than by them personally. This is because of differences in the way compensation is assessed. For example, only the estate can claim funeral expenses. The statutory bereavement award is only recoverable by a spouse, and practical input into the household is very difficult to recover for an individual in their lifetime.

However, there are some exceptions to this, for example, if the dependant has a higher income or a life-limiting health condition. 

The way the financial element of the claim is assessed also varies, so an individual concluding their claim personally would usually recover 50 per cent of their future income, but if they have a dependant, the financial dependency for the estate will be taken into account.

Of course, whether or not any IHT will actually be payable on the full value of the holiday home you purchased will depend on how your will is drafted. The estate of a married person whose will left everything to their spouse, for example, would not be liable for IHT on the holiday home they purchased unless it exceeded the nil-rate band (currently £325,000).

The issue of whether to attempt to settle your mesothelioma claim personally or to seek a delay and an assessment on behalf of your estate is a complex one, and as mentioned previously needs input from an experienced legal team with genuine expertise in the niche specialist area of mesothelioma claims.

If you want to verify your lawyer’s specialist knowledge you can check out whether they have been accredited as an expert by looking at the Association of Personal Injury Lawyers website (www.apil.org.uk). It holds a list of asbestos disease-accredited specialist solicitors.

The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.

Do you have a financial dilemma that you’d like FT Money’s team of professional experts to look into? Email your problem in confidence to money@ft.com

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