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HMRC internal manual

Inheritance Tax Manual

From
HM Revenue & Customs
Updated
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Liabilities: restricted deductions: property is no longer excluded where money has been borrowed to acquire excluded property -

Where a liability may not be allowed as a deduction because it was used to acquire excluded property (IHTM28014), the liability may still be allowed up to the value of the asset that has not been disposed of and is no longer excluded property, IHTA84/S162A(3). In other words, where excluded property that was acquired with borrowed money is now subject to IHT, the liability can be allowed, but only up to the value of the property which is now chargeable, even though the money borrowed was used to acquire excluded property in the first place.

Example

Chandra, who is not domiciled in the UK borrows £750,000 and buys a property abroad for £1m. The interest due on the loan is allowed to accumulate instead of being repaid. Chandra subsequently becomes deemed domiciled in the UK (IHTM13024) so the property is now subject to tax. On Chandra’s death, the property is worth £1.2m and the sum owed under the liability is £1.3m. As the property is now subject to tax, the liability may be allowed; but only up to the value of £1.2m. The remaining £100,000 may not be deducted.