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HMRC internal manual

Inheritance Tax Manual

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HM Revenue & Customs
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Liabilities: restricted deductions: borrowed money used to acquire assets that qualify for woodlands relief

IHTA84/S162B(5) applies where money was borrowed to acquire assets that qualify for woodlands relief, to enhance or maintain the value of such assets or to allow the planting of new trees. Where this is the case, IHTA84/S162B(6) provides that the liability is first set against the value of the trees or underwood in arriving at the value to qualify for relief. This is the case even if the liability is actually secured against other assets in view of the amendments to IHTA84/S162(4) (IHTM28392).

The election (IHTM04371) to leave the value of the trees and underwood out of account, will then apply to the net value of the trees and underwood after the liability has been deducted.

Where the liability is more than the value of the trees and underwood, and the ‘prairie’ or bare value of the land qualifies for business relief, the balance of the liability must be set against that part of the value of the assets before being set against any other assets that are chargeable to tax, subject to the provisions of IHTA84/S175A (IHTM28027).

Example

Monica borrows £200,000 which she uses to buy woodland. At the date of her death the value of the trees and underwood is £225,000. A claim is made for the value of the trees and underwood to be left out of account under IHTA84/S125.

As the £200,000 liability had been incurred to finance acquiring the woodland the liability is taken to reduce the value of the trees and underwood, before their value is left out of account, by virtue of IHTA84/S162B(6).

So, the £225,000 is reduced to £25,000 and it is this £25,000 value that is left out of account.

Provided the liability meets the provisions of IHTA84/S175A, the value of the woodlands is reduced to nil (£225,000 less £25,000 left out of account less £200,000 liability).