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HMRC internal manual

Inheritance Tax Manual

HM Revenue & Customs
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Liabilities: restricted deductions: meaning of ‘indirectly’

The word ‘indirectly’ at IHTA84/S162A(1), IHTA84/S162B(1)(b), (3)(b) & (5)(c) significantly broadens the scope of the provisions. It reduces the possibility of avoiding the restrictions by inserting a step or steps in the process of acquiring excluded or relievable property with the borrowed funds.

As with the pre-owned assets charge (IHTM44005), it is not necessary to show any intention that the funds should eventually be converted into excluded or relievable property when a loan was taken out. Inserting steps in an attempt to disguise the true nature of a transaction will be a strong indicator of indirect financing. And the acquisition of assets of any nature as part of a sequence of transactions that ends with the acquisition of excluded or relievable property will not necessarily be sufficient to prevent the deduction being disallowed.

In IRC v Stype Investments (Jersey) Ltd (1983) Unreported, but see Capital Taxes News & Reports, March 1987 Vol 7, No.17; Vinelott J observed that the word ‘indirectly’ was used to make it clear that the (Inland Revenue) charge extended not only to the proceeds of sale of property subject to the charge and to property purchased with those proceeds (which may be said to represent that property ‘directly’) but also to any property into which the property subject to the charge or the proceeds of sale can be traced. Whilst this view may have been expressed in connection with an administrative process, it shows the potentially broad scope of the word.

There is no number of steps or a timescale beyond which borrowing money can be regarded as safe from being attributed to the acquisition of excluded or relievable property. And there is no statutory let-out where the taxpayer can show that at the time the loan was taken out; there was no intention to convert the borrowed funds into excluded or relievable property. But although the word ‘indirectly’ has a broad meaning, in the context of this provision, it must be possible to reasonably attribute the acquisition of the excluded or relievable property to the borrowed funds before the deduction of the loan is disallowed. Each case will turn on its own facts. You can find some examples of situations where property is acquired indirectly at IHTM28025.