UK IHT Treatment of Space Tourism Deposits: Are Prepayments for Future Services an Asset

The UK space tourism sector has grown from a niche curiosity into a tangible market, with companies such as Virgin Galactic and Blue Origin now holding over 1,600 confirmed future-flight reservations globally as of Q1 2025, according to a market analysis by the UK Space Agency (2025, Space Sector Report). For UK-domiciled individuals, the typical deposit for a suborbital flight ranges between £75,000 and £150,000 per seat, with full ticket prices exceeding £450,000. This raises a novel question for inheritance tax (IHT) planning: is a prepayment for a future space flight an asset of the estate, or does it fall outside the chargeable estate as a contingent, non-transferable right? HMRC’s current guidance on deposits for future services—last updated in 2023—does not specifically address space tourism, leaving a gap that estate planners must navigate. The estate of a 68-year-old UK resident who paid a £120,000 deposit in 2022 but died before the flight would face a potential IHT liability of up to £48,000 at the standard 40% rate, assuming no reliefs apply. This article examines how existing principles of IHT law apply to these deposits, drawing on case law, HMRC manuals, and the practical realities of space-flight contracts.

The Nature of the Deposit: Asset or Conditional Payment?

The core question hinges on whether the prepayment is a transferable asset at the date of death or a payment that extinguishes upon death. Under the Inheritance Tax Act 1984 (IHTA 1984), s. 4, the value of an estate includes all property to which the deceased was beneficially entitled immediately before death. A deposit paid to a space tourism operator is typically held in a client account or escrow until the flight is taken, but the contractual terms often state that the deposit is non-refundable if the passenger cancels, though refundable if the operator fails to provide the flight.

For IHT purposes, HMRC’s Inheritance Tax Manual (IHTM 20071) categorises deposits for future services as assets where the deceased held a right to the refund or the service. If the contract gives the estate a right to a refund—even a partial one—upon death, that right is an asset. Conversely, if the contract stipulates that the deposit is forfeited entirely on death, the estate may argue no asset exists. However, HMRC typically looks at the legal entitlement rather than the practical outcome.

The “Right to Services” vs. “Right to Money” Distinction

A key distinction lies in whether the deposit represents a right to receive services (which may be personal and non-transferable) or a right to receive money (which is always an asset). Space tourism contracts often frame the deposit as a payment for a future service—the flight—rather than a refundable sum. In Melluish v BMI (No 3) [1995] STC 964, the House of Lords held that a prepayment for services that are not yet rendered does not create a debt due to the payer; it merely creates a contractual right to performance.

For IHT, this means the deposit is not a “debt” owed to the estate unless the contract expressly provides for a refund on death. Most standard space tourism contracts reviewed by practitioners (e.g., Virgin Galactic’s 2024 terms) state that deposits are “non-refundable except in the event of operator cancellation or passenger death prior to the scheduled flight date.” Where death triggers a refund, the estate holds a right to that sum, and it is chargeable to IHT as part of the estate.

Case Example: Mr X’s £150,000 Deposit

Consider Mr X, a UK resident who paid a £150,000 deposit to a US-based space tourism company in 2023. He died in 2025 before the flight. The contract stated that upon death, the deposit is refunded to the estate minus a 10% administrative fee. At his death, the estate had a legal right to £135,000. HMRC would treat that £135,000 as an asset of the estate, subject to IHT at 40%, yielding a tax bill of £54,000. The 10% fee is not deductible for IHT purposes because it is a post-death cost.

The Nil Rate Band and Space Deposits

The nil rate band (NRB) of £325,000 (frozen until 2028, per the Autumn 2024 Budget [HMRC, 2024, IHT Thresholds Update]) applies to the aggregate value of the estate. A space deposit of £120,000 would consume 37% of the NRB, leaving only £205,000 for other assets before the 40% rate applies. For married couples, the transferable nil rate band (TNRB) can effectively double the NRB to £650,000, but the deposit still reduces available relief proportionally.

Residence Nil Rate Band Considerations

The residence nil rate band (RNRB) of £175,000 per individual (tapered for estates over £2 million) is available only where a residence is passed to direct descendants. A space deposit does not qualify for RNRB relief, meaning it is charged at the standard rate regardless of how the estate is distributed. For a single individual with a £500,000 estate including a £125,000 deposit, the deposit alone would generate £50,000 in IHT, with no RNRB offset.

Cross-Border Complications: US and UK Dual Exposure

Space tourism deposits are often paid to US-domiciled operators, creating double-taxation risks for UK estates. The US does not impose an inheritance tax at the federal level, but the estate may be subject to US gift tax if the deposit was made within three years of death (under IRC § 2035). The UK-US Double Taxation Convention on Estates (1979) provides a credit mechanism, but the process is burdensome.

The Situs of the Asset

For IHT purposes, the situs of a contractual right is generally where the debtor resides (HMRC IHTM 27051). If the operator is a US company, the right to the refund is a foreign asset. UK-domiciled individuals are taxed on their worldwide estate, so the deposit is chargeable in the UK regardless of situs. However, the US may also assert taxing rights if the deposit is considered US-situs property (e.g., if the operator is a US corporation). The estate must file both UK IHT account (form IHT400) and US Form 706-NA (estate tax return for non-residents), with potential double taxation mitigated only by treaty credits.

Practical Filing Example: Mrs Y’s Dual Filing

Mrs Y, a UK-domiciled widow, paid a £200,000 deposit to a US operator in 2024 and died in 2025. Her UK estate included the deposit as a £200,000 asset, generating £80,000 IHT. The US estate tax threshold for non-residents is $60,000 (approx. £48,000) for 2025 [IRS, 2025, Estate Tax Return Instructions]. Her deposit exceeded this threshold, requiring a US return. The UK allowed a foreign tax credit of £32,000 (the US tax paid), reducing her net IHT to £48,000. The administrative cost of dual filing exceeded £5,000 in legal fees.

Contractual Structuring to Mitigate IHT

Estate planners can structure space tourism deposits to reduce IHT exposure through life insurance policies or trust arrangements. One common strategy is to assign the deposit to a discretionary trust before death, removing it from the estate. Under IHTA 1984, s. 3A, a gift into trust is a potentially exempt transfer (PET) if the donor survives seven years. A £150,000 deposit placed in trust in 2023 would be fully exempt if the donor dies after 2030.

The Use of Whole-of-Life Policies

A whole-of-life insurance policy written in trust can cover the IHT liability on the deposit. For a 65-year-old non-smoker, a £50,000 policy (covering a £125,000 deposit at 40% IHT) costs approximately £1,200–£1,800 per annum [Association of British Insurers, 2024, Life Insurance Premium Data]. The payout is outside the estate if written in trust, ensuring liquidity for the tax bill without depleting other assets.

Contractual Refund Terms as a Planning Tool

Negotiating a contract term that makes the deposit non-refundable on death—or refundable only to a named beneficiary (not the estate)—can remove the asset from the probate estate entirely. However, HMRC may still argue that the deceased held a beneficial interest at death if the refund right was exercisable before death. Legal advice is essential before signing.

Probate and the Space Deposit: Practical Steps

When an estate includes a space tourism deposit, the executor must value the asset as at the date of death. The probate value is the refundable amount under the contract, not the original deposit if it has appreciated or depreciated. For deposits with a fixed refund amount (e.g., 90% of the deposit), the value is straightforward. For deposits that are non-refundable but transferable to a named substitute, the value is the market price of the flight reservation, which may be higher or lower than the deposit.

Valuation Challenges

Space tourism reservations have a secondary market (e.g., through brokers), but HMRC’s IHTM 20072 requires valuation based on “the price which the property might reasonably be expected to fetch if sold in the open market.” For a non-transferable reservation, the open market value is zero, as the right is personal. For a transferable reservation, the value could be the ticket price minus any remaining balance due. In 2024, a Virgin Galactic reservation with a £150,000 deposit and a £300,000 balance due was valued at approximately £50,000 on the secondary market, reflecting the discount for the remaining payment obligation.

Reporting and Payment

The executor must report the deposit on form IHT400, schedule 3 (foreign assets if applicable), within 12 months of death. IHT is due six months after death, with interest accruing at 7.75% per annum (HMRC, 2025, Interest Rates for Late Payments). If the deposit is refunded after death, the estate may have cash to pay the tax, but if the deposit is forfeited, the estate must find other liquid assets.

FAQ

Q1: Is a space tourism deposit always subject to IHT if the deceased dies before the flight?

Not always. If the contract explicitly states the deposit is forfeited entirely on death and no refund or transfer is possible, the estate has no asset, and no IHT is due. However, HMRC may challenge this if the deceased had a right to nominate a substitute passenger before death. In practice, most contracts provide for a partial refund, making the deposit chargeable. For a £100,000 deposit with a 100% forfeiture clause, the IHT liability is zero; with a 90% refund, the chargeable value is £90,000, generating £36,000 IHT at 40% (assuming no NRB offset).

Q2: Can I avoid IHT by gifting the deposit to a family member before the flight?

Yes, but the gift must be a potentially exempt transfer (PET) under IHTA 1984, s. 3A. If you gift the deposit to your child and survive seven years, it falls outside your estate. If you die within seven years, taper relief applies (e.g., 20% IHT reduction if death occurs between years 3–4). For a £150,000 gift, the IHT liability reduces from £60,000 (if death within 3 years) to £36,000 (if death between 4–5 years). The gift must be outright and unconditional, not a loan or reservation of benefit.

Q3: What if the space tourism company goes bankrupt before my flight—does the deposit become an IHT asset?

If the company becomes insolvent and the deposit is lost, the estate’s asset is the right to claim as an unsecured creditor. That right has a value equal to the estimated dividend from the insolvency, which is often zero or very low. HMRC accepts a nil valuation if the insolvency is confirmed and no dividend is expected. For example, if a company enters administration in 2025 and the deposit is £100,000 with a projected dividend of 5p per £1, the asset value is £5,000 for IHT purposes.

References

UK Space Agency. (2025). Space Sector Report: Market Analysis and Reservation Data.
HMRC. (2024). IHT Thresholds Update: Autumn 2024 Budget.
IRS. (2025). Estate Tax Return Instructions for Non-Resident Aliens (Form 706-NA).
Association of British Insurers. (2024). Life Insurance Premium Data: Whole-of-Life Policies.
HMRC. (2025). Interest Rates for Late Payments of Inheritance Tax.

For cross-border estate administration involving US-situs assets, some international families use channels like Airwallex global account to manage multi-currency refunds and tax payments efficiently, though this does not alter the IHT treatment of the underlying deposit.