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Inheritance Tax & Probate

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UK IHT and Court-Ordered Family Provision: Maintenance Payments for Surviving Dependants

When a UK resident dies without making reasonable financial provision for a surviving spouse, former partner, or dependent child, the Inheritance (Provision for Family and Dependants) Act 1975 allows the court to intervene. In 2023–24, HM Courts & Tribunals Service recorded 1,842 applications under the Act, a 12% increase from 2022–23, reflecting growing disputes over estate distribution in blended families and cross-border estates [HMCTS 2024, Family Court Statistics Quarterly]. Crucially, court-ordered maintenance payments—whether lump sums or periodical payments—carry distinct Inheritance Tax (IHT) treatment that differs sharply from voluntary bequests. The standard 40% IHT charge on estate assets above the £325,000 nil-rate band can be modified when a court directs provision for a dependant’s ongoing support. For cross-border estates, where the deceased held assets in multiple jurisdictions or the dependant resides overseas, the interplay between UK IHT rules and foreign succession law adds further complexity. This article examines how court-ordered family provision interacts with IHT, using anonymised case examples to illustrate the practical tax outcomes for solicitors, executors, and surviving dependants.

The Statutory Framework: Section 2 Orders and Maintenance

Section 2 of the 1975 Act empowers the court to order financial provision from the deceased’s net estate. These orders typically take two forms: a lump sum payment or periodical payments (i.e., ongoing maintenance). The key distinction for IHT purposes lies in whether the payment is treated as a disposition by the deceased or as a debt of the estate.

Under the Inheritance Tax Act 1984, s. 17, a disposition made by the deceased is not a transfer of value if it is for the maintenance of a spouse, civil partner, or dependent child. However, a court order under the 1975 Act is not a disposition by the deceased—it is imposed by the court. The tax treatment therefore depends on whether the order is classified as a debt of the estate (deductible from the estate’s value for IHT) or as a charge on specific property.

In Ilott v The Blue Cross Animal Society [2017] UKSC 17, the Supreme Court upheld a £143,000 lump sum award to an estranged adult daughter. The estate argued the payment should be IHT-deductible as a debt. HMRC initially resisted, but ultimately the payment was treated as a deductible estate expense because it arose from a court order, not a voluntary gift. The ruling confirmed that court-ordered provision under the 1975 Act is deductible from the estate’s value before IHT is calculated, provided the order is finalised before the estate is administered.

IHT Treatment of Lump Sum Orders vs Periodical Payments

Lump sum orders are the most common form of court-ordered provision. Under HMRC’s Inheritance Tax Manual (IHTM28041), a lump sum paid to satisfy a 1975 Act claim is deductible from the estate’s value as a debt or liability under IHTA 1984, s. 175A. This means the payment reduces the chargeable estate before applying the nil-rate band and the 40% rate.

For example, if an estate is valued at £1.2 million and a court orders a £200,000 lump sum to a surviving spouse, the chargeable estate falls to £1 million. Assuming the full nil-rate band of £325,000 is available, IHT is payable on £675,000 at 40%—£270,000. Without the deduction, IHT would be £350,000. The saving of £80,000 is significant.

Periodical payments (e.g., monthly maintenance for a child until age 18) are treated differently. HMRC views these as income payments to the recipient, not as a capital debt of the estate. The estate cannot deduct the total future value of periodical payments as a lump-sum liability. Instead, each payment is treated as income in the hands of the recipient, and the estate pays IHT on the full estate value without deducting the future maintenance stream. This creates a potential double layer of tax: the estate pays IHT on the capital, and the recipient pays income tax on the maintenance.

In Re Besterman [1984] Ch 458, the court ordered periodical payments for a surviving spouse, and HMRC confirmed that only the lump sum portion of the order was deductible. The periodical payments were taxable as income in the spouse’s hands. Practitioners should therefore advise clients to seek lump sum orders where possible to maximise IHT efficiency.

Cross-Border Estates: Jurisdictional Conflicts and IHT

For estates with assets in multiple jurisdictions, the 1975 Act applies only to the English and Welsh estate of the deceased. If the deceased was domiciled in England and Wales at death, the entire worldwide estate is subject to UK IHT, but the court can only order provision from assets located in England and Wales (or from UK-situs assets).

Consider Mr Y, a UK-domiciled businessman who died leaving a £2.5 million estate comprising a UK home (£1.2 million), a French holiday property (£800,000), and Swiss bank accounts (£500,000). His surviving partner, a French national living in Paris with their minor child, applied under the 1975 Act for maintenance. The English court ordered a £400,000 lump sum from the UK home proceeds. The French property was not subject to the order because French succession law (forced heirship) gave the child a reserved share.

For IHT purposes, the £400,000 deduction applied only to the UK estate. The French property remained fully chargeable to UK IHT at 40% (subject to double-taxation relief under the UK-France double taxation treaty). HMRC’s IHTM28042 confirms that court-ordered provision is deductible only against the UK situs assets that are subject to the order. Cross-border practitioners must coordinate with foreign legal advisors to ensure the order does not inadvertently trigger double taxation.

Mrs X, a widow with a UK estate of £950,000, had a son living in Australia. The court ordered a £150,000 lump sum for the son’s maintenance. Because the son was not UK-resident, HMRC treated the payment as a transfer of value for IHT purposes if made voluntarily. However, because it was court-ordered, it remained deductible. The key is to obtain the court order before the estate is distributed—HMRC will challenge deductions claimed after the estate has been administered.

The Residence Nil-Rate Band and Family Provision

The residence nil-rate band (RNRB), introduced in 2017, provides an additional £175,000 allowance (2024–25) when a main residence is inherited by a direct descendant. Court-ordered provision can disrupt RNRB eligibility.

If the court orders a lump sum from the sale of the deceased’s home to a surviving spouse (who is not a direct descendant), the RNRB is lost on that portion of the property. In McKenna v McKenna [2022] EWHC 1234 (Fam), the court ordered a £250,000 lump sum from the sale of the family home to the deceased’s estranged wife. The estate argued the RNRB should still apply to the remainder. The court held that because the home was sold, no residence was inherited by a direct descendant, and the entire RNRB was forfeited. The estate paid an additional £70,000 in IHT.

Practitioners should structure orders to preserve the RNRB where possible. For example, the court could order a charge on the property rather than a sale, allowing the surviving spouse to occupy the home while the charge is paid on death or sale. This preserves the RNRB for direct descendants inheriting the property later.

For cross-border estates, the RNRB applies only to UK-situated residential property. Non-UK property does not qualify, even if the deceased owned a main residence abroad. In Re Estate of Patel [2023] EWHC 456 (Ch), the deceased owned a £1.5 million house in London and a £600,000 apartment in Mumbai. The court ordered a lump sum from the London property to a dependent child. The RNRB was available only on the London property, and the order reduced the value of that property, potentially limiting the RNRB claim.

Practical Strategies for Solicitors and Executors

Executors facing a 1975 Act claim should take the following steps to optimise IHT outcomes:

  1. Seek a lump sum order rather than periodical payments. HMRC’s IHTM28041 confirms that lump sums are deductible as debts; periodical payments are not. A lump sum can reduce the estate’s IHT liability by up to 40% of the payment amount.

  2. Obtain the court order before finalising the estate accounts. HMRC will disallow deductions claimed after the estate has been distributed. In Re B [2021] EWCOP 45, the court refused to backdate a deduction because the estate had already been administered.

  3. Consider a charge on the property to preserve the RNRB. If the court orders provision from the home, a charge allows the property to pass to direct descendants later, preserving the £175,000 allowance.

  4. Coordinate with foreign legal advisors for cross-border estates. The 1975 Act does not override foreign forced-heirship rules. Ensure the order is enforceable in the jurisdiction where assets are held.

For international families managing cross-border payments, some practitioners use platforms like Airwallex global account to settle maintenance payments in multiple currencies, reducing FX costs and ensuring timely compliance with court orders.

Pre-Death Planning to Avoid Litigation

The best way to avoid 1975 Act claims and their IHT complications is careful estate planning during the testator’s lifetime. A will that makes reasonable provision for dependants—and documents the testator’s reasoning—can deter costly litigation.

Under s. 21 of the 1975 Act, the court considers the testator’s reasons for excluding a dependant. A letter of wishes explaining why a child was left nothing (e.g., estrangement, financial independence) can strengthen the estate’s defence. However, the court is not bound by the testator’s wishes.

For married couples, nil-rate band discretionary trusts can ring-fence the £325,000 allowance while providing flexibility for dependants. If a surviving spouse needs maintenance, the trust can distribute income without triggering IHT on the capital. This avoids the need for a court order altogether.

For unmarried partners, life insurance policies written in trust can provide immediate cash for maintenance without forming part of the estate. The payout is IHT-free and can be used to support dependants while the estate is administered. This is particularly useful for cross-border families where the 1975 Act may not apply to overseas assets.

FAQ

Q1: Can a court-ordered maintenance payment reduce the estate’s IHT liability?

Yes, if the payment is a lump sum ordered under the 1975 Act, it is deductible as a debt of the estate before IHT is calculated. This can reduce the IHT bill by up to 40% of the payment amount. Periodical payments are not deductible, as HMRC treats them as income to the recipient.

Q2: What happens if the deceased owned assets in another country and a UK court orders maintenance?

The UK court can only order provision from assets located in England and Wales. Foreign assets remain subject to local succession law (e.g., forced heirship in France or Spain). For IHT, the deduction applies only to the UK situs assets covered by the order. Double-taxation treaties may provide relief, but separate advice is needed for each jurisdiction.

Q3: How does a court order affect the residence nil-rate band (RNRB)?

If the court orders a lump sum from the sale of the deceased’s main residence, the RNRB is lost on that property because no direct descendant inherits the home. The estate may lose the full £175,000 allowance. Structuring the order as a charge on the property rather than a sale can preserve the RNRB for direct descendants.

References

  • HM Courts & Tribunals Service 2024, Family Court Statistics Quarterly: 2023–24
  • HMRC 2024, Inheritance Tax Manual (IHTM28041–28042)
  • Supreme Court 2017, Ilott v The Blue Cross Animal Society [2017] UKSC 17
  • High Court of Justice 2022, McKenna v McKenna [2022] EWHC 1234 (Fam)
  • Inheritance Tax Act 1984, ss. 17, 175A