IHTM28014 - Liabilities: restricted deductions: borrowed money used to acquire excluded property
Where borrowed money was used:
- either directly or indirectly to acquire excluded property, or
- to enhance or maintain the value of excluded property,
the loan cannot be deducted when arriving at the value subject to Inheritance Tax, IHTA84/S162A(1). The same rule applies where borrowed money was used to acquire, enhance or maintain assets that become excluded property, IHTA84/S162A(5).
There are two common situations where this would apply:
- the trustees of an excluded property trust that owns assets in the UK borrow money and then set the debt against those assets immediately before the ten-year anniversary. They invest the borrowed funds abroad so that they become excluded to avoid the ten-year charge, and
- a person who is not domiciled in the UK borrows money from a UK source, secured against their UK assets, and buys a property abroad.
It may also apply where a person domiciled in the UK acquires an interest in an excluded property trust, depending on the nature of the interest acquired.
The meaning of the word ‘indirectly’ is explained in more detail at (IHTM28013).
Example 1
The trustees of an excluded property trust, which includes UK property of £1.5m, borrow £1m which they charge on the UK property. They use the funds to buy shares in an overseas company, which are excluded property. Although the liability is charged on UK property, IHTA84/S162(4) (IHTM28392) does not apply because the liability is disallowed by IHTA84/S162A. This is because the liability has been incurred to directly finance the acquisition of excluded property.
Example 2
The trustees of an excluded property trust borrow £1m which they charge on existing UK property worth £1.5m. They transfer the £1m to a sterling bank account offshore, which is excluded property. The liability is disallowed by IHTA84/S162A because the liability has been incurred to directly finance the acquisition of excluded property, which is money now held in the foreign bank account.
Example 3
The trustees of an excluded property trust borrow the equivalent of £1m in Euros from an offshore bank, which they leave in an offshore account. They charge the debt on existing UK property worth £1.5m. The liability is disallowed by IHTA84/S162A because it has been incurred to acquire the £1m in Euros which remains offshore and is excluded property.
In all three of these examples, before the FA13 the chargeable value of the trust would have been £500,000 (£1.5m of chargeable UK property less the £1m liability). Following FA13 the liability incurred to acquire excluded property is disallowed and the chargeable value of the trust is the equivalent of the chargeable UK property at £1.5m.
There are, however, three statutory exceptions to this general rule. These are where the excluded property: