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HMRC internal manual

Inheritance Tax Manual

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HM Revenue & Customs
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Liabilities: restricted deductions: partial repayment of liabilities after death

Where a liability is partially repaid after death only the part of the loan that has been repaid will be allowed as a deduction, unless the balance that has not been repaid meets the conditions of IHTA84/S175A(2), (IHTM28029).

Where borrowed money has been used to acquire a mixture of excluded property (IHTM28014), finance a foreign currency bank account (IHTM28033) and/or relievable assets (IHTM28019) and the loan has been partially repaid, IHTA84/S175A(7) sets out the priority in which the partial repayment should be allocated against the assets of the estate. The provisions cover the situation where the single loan has been used to acquire other chargeable assets as well. Note that references to a foreign currency bank account only apply to deaths on or after 17 July 2014.

Any part of the liability that is attributable to excluded property is treated as being repaid first, IHTA84/S175A(7)(a), with the result that although this part of the liability has been repaid, the deduction is still disallowed under IHTA84/S162A (IHTM28014), unless one of the exceptions is satisfied. If the partial repayment was greater than that part of the liability, the part of the liability that is attributable to a foreign currency bank account is treated as being repaid next, IHTA84/S175A(7)(aa), so the deduction is still disallowed under IHTA84/S162AA (IHTM28033). If the partial repayment was greater than that part of the liability, the part of the liability that is attributable to relievable property is treated as being repaid next IHTA84/S175C(7)(b), so that this part of the loan is a valid deduction against the estate, but it will reduce the value of the property that can qualify for relief; ultimately reducing the relief to nil.

And if the partial repayment was greater than the part of the liability attributable to all the above categories of asset, the remainder of the liability can then be allowed as a deduction against the chargeable estate, IHTA84/S175A(7)(c).

Example

Neville, who is non-UK domiciled, borrows £1.5m from an excluded property trust. He charges the liability against his existing UK chargeable property worth £2m. He uses the £1.5m to acquire £600,000 of excluded property, £500,000 of property qualifying for agricultural relief and £400,000 of chargeable UK property. When he dies the whole £1.5m remains outstanding. The values of the assets have not changed; none of the exceptions to the general rules apply.

Under IHTA84/S162A the £600,000 used to acquire excluded property is disallowed. Under IHTA84/S162B the agricultural value of the agricultural property which can qualify for relief is reduced from £500,000 to nil.

If the liability is discharged in full from the estate after the date of death, the UK assets of £2.9m (UK property, agricultural land and other chargeable property) is reduced by the £500,000 liability set against the agricultural property and the £400,000 liability used to acquire chargeable UK assets, leaving £2m in charge.

Assume however, that only £750,000 of the liability is discharged from the estate after death.

Under IHTA84/S175A(7)(a) the first £600,000 discharged is taken to have discharged the liability incurred to acquire excluded property. This part of the liability remains disallowed by IHTA84/S162A(1)(a).

Under IHTA84/S175A(7)(b) the next £150,000 is taken to have discharged part of the £500,000 liability incurred to acquire agricultural property. As only £150,000 of this liability is treated as having been discharged, only £150,000 is an allowed as a deduction from the value of the estate on death. This reduces the value of the property that can qualify for agricultural relief to £350,000, and assuming that relief is available, the chargeable value of the property is reduced to nil.

Under IHTA84/S175A, the agricultural property that makes up part of the UK assets of £2.9m is reduced to nil by a mixture of the liability (£150,000) and agricultural relief (£350,000) leaving a chargeable estate of £2.4m

Assume now that £1.3m of the liability is discharged from the estate after death.

Under IHTA84/S175A(7)(a) the first £600,000 repaid is taken to have discharged the liability incurred to acquire excluded property. Under IHTA84/S175A(7)(b) the next £500,000 is taken to have discharged the liability incurred to acquire agricultural property. As the value of the agricultural property is reduced to nil by deducting the liability, there is no agricultural relief. Under IHTA84/S175A(7)(c) the remaining £200,000 of the liability which has been discharged can be taken into account to reduce the value of the chargeable estate.

The deduction allowable under IHTA84/S175A is therefore £700,000 (£500,000 + £200,000) so the chargeable estate is reduced from £2.9m to £2.2m.